Inflation vs growth: RBI’s choice is clear

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Sunday , February 10, 2008 at 2332 hrs point, and RBI governor Yaga Venugopal Reddy seems to feel that can wait at this juncture, unless growth figures turn dangerously negative. The recent data released by the Central Statistical Organisation that has predicted a slowdown in growth rate for 2007-08 to 8.7% from 9.3 % is disappointing indeed. But even at that rate the growth, as most economists say, is satisfactory. To arrive at an equilibrium as to which needs to be addressed first, inflation or growth rate, the RBI has opted to experiment with targeting inflation first.

This a deviation from the central bank’s stand in the early nineties, the days of early reforms that pushed up inflation as well as interest rates, following the rapid pace of growth. At this point, it is only when the actual growth figures are officially out for the current year, can the RBI take a stand on interest rates. The RBI could keep the rates same or even lower rates if there are clearer signs of a slowdown.

The bets are on a low interest rate regime in the next fiscal, beginning April 1. Why else are banks, especially government banks cutting rates now?