While Rajan’s monetary policy review did ensure to handle two of the
trinity trilemma i.e. sinking rupee and rising inflation but the last one i.e.
meek growth demands Government action.
With US
Federal Bank postponing quantitative easing withdrawal and with debutant
RBI-Chief Raguram Rajan coming up with pragmatic monetary policy, positivity
seems to have enthused in Indian economy. On one hand the breather given by
Fed-Chief Ben Bernanke has ensured that Foreign Institutional Investments
(FIIs) will remain intact till December, on the other, RBI-Chief’s move to hike
repurchase (repo) rate has signaled that notorious inflation will also be
guarded. Consequently with external and internal stability, the
rupee-volatility will soon be the thing of passé.
RBI has
raised repo rate i.e. the rate at which banks borrow from RBI for short-term
credit to 7.5% from 7.25%. Simultaneously, it has reduced Marginal Standing
Facility rate, a special and expensive borrowing window for banks, to 9.5% from
10.25%. Usually hike in repo rate translates into increased borrowing cost for
banks but considering that MSF is the effective policy rate since July which
has been lowered, cost of borrowing for banks has actually come down. The idea
behind this move is to provide fresh air to banks currently suffocated with
cash dearth but at the same time prepare them for the ensuing normalcy when
repo rate will regain its position as effective policy rate. In that case,
during normal circumstances, even if repo rate is increased from current level
of 7.25%, it will be less than the present rate of MSF, thus there will not be
any dramatic impact on banks’ cost of borrowing.
Another
positive implication of repo-rate hike is that the subsequent arbitrage
advantage in interest rates will attract more foreign investors, something
which is needed to shore up foreign reserves. Increase in repo-rate also
suggests RBI’s hawkish stand on inflation front. Fighting inflation through
increased rates is justified as it is undoubtedly notoriously high inflation
which fuels the vicious cycle of economic slowdown. Though it will hurt the
already languishing growth with expensive loans and all but lower inflationary
pressure is required even if it comes at the cost of short-term growth.
The so
called impossible trinity trilemma of sinking rupee, rising inflation and meek
growth has to be dealt with now. While Rajan’s monetary policy review did
ensure to arrest sinking rupee and control rising inflation but meek growth
cannot be strengthened solely by RBI. It does need policy-push and legislative
reforms something which demands Government action. Effective monetary policy
will come to a copper as long as it is not backed by prudent fiscal and
legislative policies and expecting fiscal and legislative prudence on the part
of Government in an election year is like asking for moon. Therefore, thumbs up
to Rajan, a question-mark on Government’s intent!
No comments:
Post a Comment