The wait for the rate cut
(Any opinions expressed here are those of the author, and not those of Thomson Reuters)
At its mid-quarter review on Jan. 18, the Reserve Bank of India (RBI) did not cut the repo rate and also left the CRR unchanged. But it raised hopes that policy easing can follow in the fourth quarter.
The firm message the RBI has been sending all along is that it is entrusted with the singular objective of “maintaining price stability and ensuring adequate flow of credit to productive sectors”. Surely, price stability does not necessarily mean static prices but allows for a gentle rise not exceeding 6 per cent. This level of inflation the consumer can take in his stride and is really good for investment because it reduces the real rate of interest.
That has been so with most other central banks though their tolerance limit for inflation is generally low. But since the financial crisis of 2008 there has been a radical transformation in outlook. It is no longer inflation but growth that is the target.
U.S. Federal Reserve Chairman Ben Bernanke recently redefined the monetary policy objectives. The interest rate, he said, will remain at zero until the level of unemployment comes down to 6.5 per cent. Presently it is 7.7 per cent. It has also been indicated that the rate may not be increased even after unemployment drops to the target level. That is a necessary but not a sufficient condition for tightening the policy. The Fed expects that it would not be before 2015 that unemployment will be less than the target level. Hence it will keep the rate in check with quantitative easing (QE).
The same anxiety is revealed by many other central banks even from emerging market economies. The People’s Bank of China cut interest rate twice in 2012 because the rate of growth had dropped to 8.1 per cent. The Brazilian central bank has cut interest rate 10 times since July 2011 to a record low to revive economic growth.
The new mantra obviously is growth whether it is a developed country like the U.S. or emerging economies like China and Brazil. It is much easier to curb growth than to revive it. Hence the priority should be to prevent growth from falling. The RBI tried exactly its reverse. It aimed to bring down growth ‘temporarily’ in order to check inflation. The result? Growth dropped but inflation did not.
It is time that the RBI re-looks at its monetary policy objectives. If at all there is choice between reasonable inflation and possible growth it is the latter that should have priority. For, growth is not for its own sake. It means employment, it means more money with Government for poverty alleviation, it means lower budget deficit and consequently lower inflation.
The RBI has held out hope that the repo rate will be revisited in the last quarter. But minor changes don’t make an impact. What are called for are cuts in quick succession, as the RBI did in 2008, when the economy was in a similar chaotic state.