RBI stance has succeeded ‘to some extent’, says Subbarao

Reserve Bank Governor D. Subbarao is of the view that the recent policy monetary initiatives have succeeded “to some extent’’.

“Has the RBI succeeded in its efforts? To some extent, I would say,” Subbarao remarked during the course of a lecture delivered here.

Inflation front

The gains can be seen on the headline inflation front. But core inflation remains to be high and consumer price inflation is in double-digits, he admitted.

In a low-growth, high-inflation scenario, it is worthwhile to imagine what the situation would have been without RBI’s action of tightening.

There are lots of inflationary pressures being built up in the system. Inflation cannot be reined in without sacrificing some growth.

“Some sacrifice is built into monetary tightening but the impact would be only for the short-term,” the RBI Governor said.

Monetary action can’t be helped since it is low and stable inflation that make people make decisions. Inflation is a regressive tax for the silent poor.

Powerful and resourceful corporates may protest high interest rates, but there also exists a vast majority of silent poor who suffer worst from high inflation.

Silent poor

Unlike in the former’s case, their voice is not heard in the media. Also, savers want high interest rates while borrowers would not like to contract money at those rates.

Inflation is fuelled as much by domestic supply shocks as is imported (commodities, oil). Demand pressures too create inflation.

Monetary policy has to be the first line of defence in these scenarios. The RBI seeks to restrain demand while the Government has to deal with the supply side.

Interestingly, in other emerging market economies, a low-growth phase has been accompanied by low-interest regime too.

But this is not available in India. In that respect, India continues to be an outlier in the world. This has to do with high wages and infrastructural and supply bottlenecks.

Rupee depreciation

Also, depreciation of the rupee has been more intense than currencies in other EMEs.Risks to the Indian economy arise also from global uncertainty, especially in the Euro zone.

This transmits into the trade channel (exports), the financial channel and the confidence channel, the Governor said.

Capital flows are drying up because of risk aversion. Funds reverse flows and are homeward-bound during these times. So, short-terms players are withdrawing money. In this respect, India’s promise has dimmed a bit.

vinson.kurian@thehindu.co.in