RBI DOES THE RIGHT THING - MAINTAINS STATUS QUO
By Ruma Dubey
It was largely as expected – RBI kept all rates unchanged. The media called it a non-event, started talking immediately about rate cuts at the next policy scheduled for 30th July and moved on. For the market, this event is over and it needs the next fix and then the next….
But the crux remains – RBI alone cannot salvage the market and the economy. It can only aid policy actions taken by the Govt. The high retail inflation last week and then the rupee depreciation more or less had shown us the way in which the policy would move today. No one truly expected a rate cut, which is why the markets also did not react much.
People lament that RBI is concerned only about inflation and is not paying attention to growth rates. But that is precisely what the RBI is supposed to do – its prime objective is issue bank notes, formulate, implement and monitor monetary policy, maintain price stability and ensure that there is adequate liquidity in the system. So it is doing its duty well; it is the Govt which is erring. Thus to blame RBI for all the economic woes today is wrong.
Months after months, the retail inflation refuses to relent – like a fevicol ka jod, it remains stuck at high levels. At the core of this is obviously food inflation. So instead of asking why RBI is not reducing rates, why isn’t anybody asking why this food inflation continues to remain high? If retail inflation is the reason why RBI’s hands are tied, then isn’t it right to find out why inflation remains stubbornly high?
Persistence of food inflation is indeed worrisome. On one hand, we have seen pictures of cereals, grains rotting away in Govt owned godowns. So it is apparent that it is not simple economics of high demand not keeping up with supply which is leading to inflation. It is much deeper. The Govt needs to truly find out why food inflation refuses to come down, whether it is lack of proper distribution channels, improper pricing, supply constraints. We have been seeing these pictures of putrefying grains and cereals for years now so doesn’t that mean that the Govt is simply not addressing this distribution issue? The Govt worked super fast when it came to cash subsidy, to score a point when elections come calling but aren’t rotting grains a bigger issue? The Govt talks about the Food subsidy bill but is that all? When will these distribution issues ever get resolved?
Also on the rupee depreciation. Yes, today, the global factors are to a large extent responsible for the falling rupee. But do we have hopes of the currency improving? The CAD remains high and for that to come down, either exports have to go up or imports have to come down. Depending on gold alone to bring down CAD, by raising taxes will not bring down the CAD but maybe increase smuggling into the country.
The Govt really needs to get to work. Mere shuffling of the Cabinet is not going to help – it’s the same old cards being shuffled from one place to other. What is the use of this when no one really works? Food subsidy bill alone cannot be a priority today. And because it has become a priority, growth is hurting.
RBI has no elections to win or any politics to play which is why it is doing its job well. The onus, like always lay on the Govt. It needs to do much more – not just public spending, speeding up approvals for projects but it needs to address the issue of rotting grains first.
So what’s the next trigger for the markets now? The Federal Open Market Committee is meeting tomorrow and all eyes will wait for cues on end of easing. The US central bank could begin to reduce, or taper, its $85 billion in monthly mortgage bond and Treasuries purchases very soon. That, for emerging markets like ours is not good news but on a bigger picture, it shows that the US economy is gaining momentum which is why it does not need the artificial support of stimulus.
But the best triggers can come from our Govt – announcements of projects getting cleared, FDI easing, basically assurance that its working. That, at the moment seems more like a wish list…..