We hope the Reserve Bank of India (RBI) will continue to ease to support growth on June 18. Given April 17’s 50-basis point cut, it may be too much to expect another repo rate reduction, especially as RBI had warned that the room for further easing was limited. No matter.
It is just as critical that RBI Governor D Subbarao cut the cash reserve ratio to normalise money growth. After all, until liquidity improves, banks will find it difficult to cut lending rates even if the RBI cuts policy rates. Unless lending rates come down, growth will surely fall short of our modest 6.5 per cent this year, forget the RBI’s 7.3 per cent.
What about inflation? We do expect it to pierce eight per cent in the coming months, especially once Delhi raises oil prices. Yet, although I fancy myself a hawk, it is surely time to introspect if self-flagellation by killing growth can really contain ‘imported’ inflation from high oil prices fuelled by easy global liquidity. Econ 101, do recall, teaches us that all monetary policy can really control is core inflation — that is, inflation adjusted for food, oil and metal shocks. This has indeed come down to reasonable five per cent levels. If truth be told, India’s ‘inflation problem’ is not really as acute as we are lamenting. If India saw nine per cent inflation and 6.5 per cent growth last year, Brazil saw 6.6 per cent inflation and 2.7 per cent growth and Russia 8.5 per cent inflation and 4.3 per cent growth.
Lower lending rates hold the key to recovery. After all, India is probably the world’s only economy where lending rates have pierced their 2008 peak! Although high borrowing costs are slowing loan demand, lending rates are not coming off commensurately as the RBI’s FX intervention has pulled down money (and deposit) growth even more. M3 growth has crashed to 13 per cent levels from 16.4 per cent in September. Restoration of M3 growth to say, 16 per cent — consistent with 7.5 per cent growth — through open market operations and cash reserve ratio cuts, needs to be a national priority. An easy way to do this is to announce an open market operations calendar for say, another Rs 1,00,000 crore for the rest of the financial.
Indranil Sen Gupta is India economist at Bank of America Merrill Lynch
