Taking a call on growth-inflation trade-off is being seen as delicate
Ahead of the annual credit and monetary policy announcement on April 17, Reserve Bank of India Governor D. Subbarao on Saturday met Prime Minister Manmohan Singh and Finance Minister Pranab Mukherjee, as is the standard practice, for discussions on the current macro-economic environment and the steps that need to be taken to spur growth while containing inflation.
For the apex bank, taking a call on the growth-inflation trade-off in the current economic situation is being seen as particularly delicate and difficult. For, industrial recovery is not taking place at the pace that was expected and, at the same time, headline inflation appears to be indifferently poised at the higher level of near 7 per cent. In the event, pitching for one of the two major economic parameters may turn out to be at the expense of the other.
India Inc., represented by its various chambers, has been clamouring for a cut in the RBI's key policy repo (short-term lending) rate as the prevailing high interest rate regime has already impacted factory output significantly. With industrial growth in January, as measured by the IIP (index of industrial production), drastically scaled down to 1.14 per cent from 6.8 per cent wrongly estimated earlier, and growth in February at a tepid 4.1 per cent, it is clear that investments are not taking place at the level desired.
Commenting on the IIP data earlier this week, the Finance Minister had also clearly hinted at more pro-active steps to revive growth. “These [IIP] figures will have bearing on monetary policy announcement scheduled for next week … The government along with the RBI will take [the] required steps to revive activity in the economy,” Mr. Mukherjee had said.
On the flip side, economists have expressed concern over the fact that inflation, though on a declining trend, has not come down to comfortable levels.
Prime Minister's Economic Advisory Council (PMEAC) Chairman C. Rangarajan, while airing his views on the current economic situation recently, had particularly highlighted this aspect of rising prices that need to be tamed. Moreover, there is already an element of suppressed inflation by way of high oil prices on which the government is yet to take a decision on whether and how much should be passed on to the consumer.The RBI, on its part, has been adopting a tight monetary policy since March, 2010, to contain the inflationary spiral.
While it raised the repo rate 13 times since, it has refrained from doing so during the past three policy reviews.
Instead, it eased the cash reserve ratio (CRR) in its bid to ease the liquidity crunch that corporates had been facing in recent times.