Letters: Policy reactions

This refers to the editorial “Hawkish talk, dovish walk” (November 3). The Reserve Bank of India (RBI) has been continuously raising repo and reverse repo rates for the past six months. The RBI’s policy reactions to the current inflationary situation do not meet the complicated macroeconomic challenges that the Indian economy faces. On the one hand, there have been continuous capital inflows (read more liquidity), which have the potential of altering the RBI’s maths.

On the other hand, inflation remains high, suggesting the monetary authority’s helplessness. Despite several interest rate increases, real interest rates remain negative. In fact, RBI’s failure to contain inflation becomes quite evident when one notices that the gap between India’s inflation rate and the interest rate is the highest among all major economies.

The unfortunate part of the inflation story is that the RBI governor in his interview with Business Standard (“Current account deficit is a challenge”, November 3) has neither admitted the inability of monetary policy alone to control inflation nor called for the need to use supply management tools (read government policy interventions). It is high time that the RBI and the government started working together to contain inflation through the policy instruments (selective credit controls by the RBI or increasing foodgrain supply by the government) that have not been used so far, or else India’s growth story will be threatened. 

K V Rao, Bangalore