Inflation vs growth: RBI’s choice is clear

Font Size

Print

Feedback

Email

Discuss

Save & Share Article

What’s this?

Digg	My Yahoo	Fark
del.icio.us	Newsvine	Reddit

Rate This Article

When the Reserve Bank of India (RBI) unfolded the third quarter review of its monetary policy on January 29, most bankers were surprised that the central bank left key policy rates unchanged.

The RBI’s stand was even more of a shocker when major central banks like the US Fed and Bank of England recently slashed rates to boost their economies that slowed down due to the recent subprime mortgage crisis, estimated at a whopping $300 to $400 billion.

The mortgage crisis of mid-2007 has subsequently snowballed into a major liquidity crunch in developed economies such as the US, thereby forcing the central banks to make funds available at cheaper rates.

There have been various accusations hurled at the RBI for not lowering key rates when the global Economy has been slowing down in addition to the domestic Economy. Foreign institutional investors are now less inclined to increase their equity exposures on Indian bourses and have been pulling out funds systematically since this year. From January 16 to February 2, the data published by the Securities and Exchange Board of India reveals a net outflow of nearly Rs 15,000 crore.

FII inflows have nearly stopped and a section of the market is now worried.

They now believe that FIIs have withdrawn monies because India is no longer an attractive destination for overseas investors. But that was always hot money and never intended to stay permanently nor is it a sole barometer for growth.

Much more writing on the wall is needed to conclude a retardation in growth.

Many hedge funds and foreign banks, whose parent organisations have incurred huge losses on account of subprime credit losses in the US and other developed economies, are now repatriating funds back home and not on account of Indian equities being unattractive. Natural, as it seems they are following the market practice of profit booking and offsetting losses.

One of the key reasons for the RBI to leave key policy rates unchanged stems from the fact that it is not in a pre-emptive mode as much as that of remedying sickness after diagnosing the illness. Secondly, its single goal now is that of keeping inflation under check. The WPI for the week ended Jan 26 has already spiraled upwards of 4% to 4.11% from the previous week’s 3.93%.