The Reserve Bank of India (RBI), in its Financial Stability Report released recently on the health of the Indian financial sector, has expressed concerns over runaway inflation — estimated at 9 per cent. It has also raised concerns over the rising bad loans in the real estate sector, the government living beyond its means, the possibility of the European debt crisis spreading to advanced economies and the growing fiscal deficit, among other things. In its effort to tackle inflation, the RBI has been raising key policy rates since March 2010. High interest rates, however, are not good for the economy since they translate into increased borrowing costs. Yet the RBI has again decided to increase key policy rates to contain inflation and sacrifice growth in the medium term.
Dealing with inflation should remain a priority, but the extent of economic uncertainty should prompt the RBI to work out various permutations and combinations on a continuing basis to keep the wheels of the economy rolling. Though the RBI is doing its part, the onus now lies on the government. The government should proceed in earnest to correct the demand-supply mismatch in the market and learn to live within its means since management of government expenditure is posing a greater challenge to fiscal consolidation.
Srinivasan Umashankar, Nagpur
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