The RBIs modest 25 basis points cut in the Bank Rate appeared to be more of a concession to public opinion than based on a professional assessment of its efficacy in stimulating demand or investment. Having yielded to populism on this score, the RBI cleansed itself of any guilt by repeating its warning on the prime lending rate (PLR) and spreads. Very rightly, the central bank has expressed the view that the wide spreads provide opportunities for non-transparency. Banks must heed the RBI warning on PLR and spreads. The only surprising element in the governors statement is the sanguine view he takes on inflation. Contrary to some concern expressed by economists that inflationary pressures may be reasserting themselves, even at a time when growth was likely to be moderate, the RBI has taken the view that the domestic inflation outlook still looks comfortable. Though, for good effect it has also emphasised that the avoidance of a resurgence of inflationary pressures must remain an important objective of macroeconomic policy.
Another reason that the RBI has sought a breather from any further action on the monetary and credit policy front this fiscal may well be its concern about likely political pressures on this score. That such pressure is being exerted on the central bank is signalled not only by the presence of the finance minister in Mumbai days before the announcement of the credit policy, an unusual coincidence, but also by the fact that RBI has made a couple of populist gestures on priority sector lending to small farmers and small enterprises, a hot topic with politicians!
Governor Jalan is right in asserting that the limits to monetary policy may have been reached in trying to accelerate economic growth in the short-term. Most of the action must now move to the financial sector and fiscal reform. The union finance ministry is reportedly busy putting together a package on fiscal reform. The first part of that package was unveiled by Dr Kelkar. Mr Singhs mid-term review of fiscal and economic policy, coming after the union cabinets endorsement of the Planning Commissions 8 per cent target growth rate for the Tenth Plan period, signals a new commitment to an economic policy agenda on the part of the government. Hopefully, the government will not disappoint with a return to business as usual and will keep the focus on the economy in the coming months.