We Shouldn’t Have Had This Policy

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: With mayhem in markets and continued political uncertainty, this is not the best of times for RBI to make credit policy announcements. However, now that elections are over, the ritual of an annual policy cannot be postponed and one should reiterate the point often made by Bimal Jalan.

In a liberalized environment, should one persist with this biannual ritual? Shouldn’t changes in Bank Rate, repo rate or CRR be instead made as and when necessary?

Without a government, without a budget, without the Common Minimum Programme and without the overall policy direction, what does one expect RBI to do or say? Hence, the status quo continues and we wait for October.

Part of the interest around this bi-annual ritual concerns RBI’s expectations about growth and inflation. The 8.5% plus GDP growth in 2003-04 rode on the low 2002-03 base and is impossible to replicate in 2004-05. However, industry is recovering, there are signs of investment picking up, credit offtake has improved and preliminary forecasts are of a normal monsoon.

Arguably, thanks to the economy’s momentum, some level of GDP growth is insulated from political uncertainty and change and that range for 2004-05 seems to be between 6.5 and 7%. Or so independent analysts think and RBI has gone along with that kind of forecast. The inflationary picture isn’t that rosy.

Global oil prices are high, a point flagged by RBI, and the extent to which this will be passed on domestically is completely unknown. Capital flows have created a domestic liquidity cum exchange rate management problem, even if capital inflows have slowed in the last few days. Will RBI continue to intervene to arrest possible rupee appreciation? While the answer waits formation of a new Cabinet, RBI probably expects inflation to inch up to around 5.5%. Hence, there is no case for slashing the Bank Rate or the repo rate. Nor even the CRR, even if one doesn’t discard the long-term target of reducing it to 3%.