Your editorial “Well below trend” (August 1) rightly suggests that “the RBI needs to consider whether it has lost the crucial balance between growth support and inflation-fighting that a central bank must maintain”. However, I differ with your view that the RBI’s balance of its twin objectives – growth and inflation – may be wrong. It is, in fact, currently tilted. The central bank does not seem to be focusing on its main aim of “controlled expansion”; it has instead maintained its avowed focus on “controlling inflation”. Unfortunately, things are not happening the way the RBI desires.
One is not sure whether the policy stand the RBI governor has taken in the recent monetary policy review will help control inflation. But it will certainly dampen sentiment. If addressing the causes of inflation is beyond the scope of monetary policy, as argued by the RBI governor, why isn’t anything being done to induce the sources of economic growth — the primary being the cheapening of the investment cost for productive economic activities?
Even though banks’ statutory liquidity ratio has been reduced to 23 from 24 per cent, theoretically releasing ~60,000 crore into the economy and thus making the same available for lending, will it be lent towards “productive activities”? In fact, the high investment cost situation deters the smaller yet productive enterprises from approaching banks for credit. Eventually, this new liquidity may largely go towards retail and conspicuous consumption. This, in turn, could induce demand-pull inflation.
Raman Kumar Agrawalla Bhubaneswar
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