RBI could have and should have, but, as expected, hasn?t cut policy rates in its monetary policy. What it has done is to point out that there?s scope for banks to reduce their lending rates. Clearly, therefore, the central bank recognises the problem in the market for credit. The question now is, as it has been for some months, whether banks will change. There?s no doubting the severe risk environment that banks faced in the months after the September 2008 crisis and right up to the last quarter. When banks perceive lending risks to be high, the price of credit will not be influenced by RBI rate nudges as it would be in less eventful times. This applied right up to the April-June 2009 quarter. But here lies the rub. Had RBI been even more radical, would its policy rates have had more heft even accounting for greater risk perception? True, the cuts in repo and reverse repo were crucial and timely countervailing forces. But, were and are they enough? This counterfactual question is important because if bank PLRs remain around the current 12.5% figure in the coming quarters, this would not be without its impact on 2009-10?s growth prospects. The other way of looking at this is to ask, having taken RBI?s approach on rates as a given for the near future, whether risk perception about lending may decrease. Is the macroeconomic environment changing substantially to make lending a happier decision? But healthy credit growth is part of that macroeconomic environment; so, things become a little complicated here. If PLRs don?t drop in the next six months, RBI can be said to have missed an opportunity.
A broader point needs to be made here. RBI?s forecast for inflation is that the headline rate will go up to 5% by the end of this fiscal. Keeping aside the important and unanswered question of how RBI measures inflation and taking this figure at face value, policymakers need to be clear that for India, high growth with moderately high inflation is a far better option than low growth with delightfully low inflation. If 8-9% GDP growth comes with 5-6% inflation, policy should learn to love it and live with it. This is made easier by the fact that some of the regular sources of inflation in India are not of the demand-push, but of the supply-crunch variety. There, the effectiveness of a tight money policy as an inflation-beater is limited. Given that RBI and the government talk and given that this is a good thing, the policymaking establishment needs to take this big call now and stick with it as India starts its recovery. Growth this fiscal year is being pegged at around 6%. While that?s impressive, given the circumstances, it is 250 to 300 basis points below the growth rate India needs to maintain to effect radical transformation. Monetary policy needs to fully accommodate the growth imperative.
