Perceptions can change quickly. Economic facts are slower to transform. The speed difference sometimes allows perceptions to obscure facts. So, murmurs about the need for interest rate cuts in India can be dismissed by those who have enthusiastically supported rate hikes as a case of changed perception (slowdown fears everywhere) obscuring facts (inflation is still in double digits). But the rate hike group is wrong?facts about an interest rate hike were obscured by perceptions about inflation. And this obscuring was blessed by monetary policy authorities. What have changed now are more facts, for example, falling commodity prices globally, and that is encouraging murmurs about interest rate cuts. But there?s no need to say it softly?the diagnosis and treatment of inflation was wrong, and inflation measurement has always been suspect. As these columns have argued many times, commodity prices were driving inflation and an appreciating rupee could have countered inflation. But anti-inflation policy was based on attacking aggregate demand and not allowing an appreciating rupee to work on prices. That meant big rate hikes, reduction in banks? lending capacity, considerable misery for industry and home ownership and a monetary policy that was contradicting its own position (the rupee was being tamped down by sterilising inflows, which was increasing liquidity in the system). Plus, there was never an attempt officially to question the WPI, a very suspect index with which to measure inflation. This allowed the pro-rate hike group to always argue that real interest rates were low. But since the denominator?inflation rate?was most likely overestimating inflation, this wasn?t a good argument, to say the least.
The plain fact is that nominal rates in India are very high?non-blue chip borrowers have to contend with loans at above 13% rates. With a different leadership in RBI and the real cause of inflation?commodity prices?softening, the always unnecessary big attack on aggregate demand now needs correction. Waiting for the misleading WPI to come down to comfortable single digits will deny India the chance of starting a recovery before the economy is dampened further?remember that rate changes work with a lag. Whether the change will take place at the next monetary policy review is RBI?s call and one hopes the central bank now prioritises growth. Much fear about a high growth-overheated economy was mongered around the time rate hikes were being championed. It is necessary to say again that an economy of India?s potential growing at above 8% consistently is not dangerous, and that in the medium term we need to want high growth and not panic over occasional inflationary spurts. First, of course, we need to find a more accurate measure of inflation.