Even as the sharemarkets disdained Reserve Bank of India’s (RBI) move to hike Cash Reserve Ratio (CRR), Indian government and financial institutes have more or less agreed upon it. The CRR crunch is a market-shocker but its seen as disguised strategy to ease out the inflation and absorb excess of 36,000 Crore in liquidity. RBI’s quarterly report has dissected the causes of current inflation and has also revised domestic growth rate as it hopes for a better tomorrow.
According to the report, the main cause of inflation is supply-driven. This year saw India and its major farmland with draught like situation. The poor rain spread-out during kharip season has fetched low agricultural yield, which is apprent now with the rising grain prices. Nevertheless, RBI is optimistic with the second rip, rabbi and hopes that the prices will ease out soon on itself. But in the same time, as the global markets are slowly picking up and industrial exports are slowly mounting, there is an additional pressure that high input cost and wages will further exacerbate the situation. The current wave of inflatation is also delving into other sectors, worsening the overall economic projections.
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Although India has fought resiliently with the 08-09 meltdown by successfull decoupling from global economy, the recovery in adavanced economies such as America and Europe will be difficult to deal with. This is because the global recovery is coupled with high commodity prices in the world markets, which will push the inflation in Indian region. Besides, future projections may delay sells of grain reserves for anticipation of better pricing. So far, as RBI sees this, importing sugar, cereals and edible oils is an expensive option. This amidst the two ongoing deficits, fiscal and current, may turn into overall anonalies.
RBI further comments that there is wider discrepancy between different inflation indicators, e.g whole sale price index (WPI), consumer price index (CPI). The WPI for instance, was highest in the beginning of last year which went into negative after government announced its stimuls plan and sixth pay commission. It was again shot up in the festive month of September and then again in December. But CPI remained elevated ever since, causing serious concerns. There is a strong feeling based on the assumption that normal monsoon this year and stable oil prices will not fuel the difference after July 2010.
As a corrective measure, based on the shape of global recovery and domestic growth rate, RBI’s monetory policy will withdraw from the exapansionary “managing of the recovery”. But the hiking of the CRR, as seen by many, is indirectly solving the problem of inflation. It attempts to robustify Indian economy from the consolidating global recovery which will otherwise push the commodity prices beyond managable. The skeptics also say that even if the manufacturing industry will see this counter-intuitive, the banking sector will not. The crisis-driven low earnings on loans and larger reserve ratios mandated by CRR-hike, is going to eat up their margins.
The only silver lining seems to be, RBI’s revised growth rate, which it now states at 7.7% for the year 2010, up from last year’s 5.6%. Is it too much, too soon, let’s wait and watch!
Article based on RBI’s third quarter review of monetory policy (2009-10).
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