RBI's caution on inflation good for fragile economy
By The New Indian Express
31st July 2012 11:59 PM
The Reserve Bank of India has taken a cautious course in leaving lending, borrowing and Cash Reserve Ratio rates unchanged. With the threat of a drought looming large it felt higher growth could be sacrificed in the short run but inflation needed to be controlled at all costs. However, the Statutory Liquidity Ratio (SLR) — the amount of deposits banks park in government bonds — was reduced by one per cent to 23per cent. This, it reckons, would ensure free flow of credit growth through enough liquidity in the system. Though the corporate sector is bound to express misgivings about leaving the key rates unchanged, the apex bank has displayed sagacity and realism by not yielding to the lobbying for a rate cut. Given the circumstances lowering policy rates would only aggravate inflationary impulses without necessarily stimulating growth, as the RBI governor explained.
The RBI had given an indication of this status quoist stance in the quarterly policy review on Monday itself when it called upon the government through policy actions like removal of bottlenecks in infrastructure sector, creating a climate for domestic and foreign investment and curbing wasteful expenditure to contain the fiscal deficit. Decisive policy actions supported by credible commitment to a long-term strategy for correcting macroeconomic imbalances and stimulating investment is crucial to revive confidence and provide space for monetary policy to help sustain growth while keeping inflation under control.
There may be some disappointment at the lowering of the growth rate projection from 7.3 per cent to 6.5 per cent but it would have been imprudent not to see the writing on the wall. During the fourth quarter of last fiscal, the economy had grown at a nine-year low rate of 5.3 per cent. During the entire fiscal of 2011-’12, the economy grew by 6.5 per cent. The challenge before the government now is to cut populist spending and to improve the investment climate by implementing long-pending reforms.
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