RBI gets decisive

Its latest move aims to curb excess demand, but it may be too late

The Reserve Bank of India has finally decided to bite the bullet, and one only hopes it’s not too late. There is a view that the half per cent rate hike the RBI announced in its monetary policy review on Tuesday should have come a while back: the six or seven quarter per cent hikes in the last few policy reviews had failed to temper rising inflation. Since none of these “baby steps” — as RBI governor D Subbarao described his earlier policies — could curb inflation, he decided to adopt a more hawkish stance. As he himself noted, this was a demand side problem, very different from the supply side problem seen since 2009. This was reflected in high food prices, particularly of pulses, the poor man’s protein. The RBI’s latest move aims to curb the demand syndrome, which is driving inflation. There is a lot of disposable income chasing too few goods. The RBI is trying to temper this demand. Those who have taken home loans and personal loans will be hit the hardest, followed by those with car and other loans. The middle class and the poor will feel the impact; the rich will continue to splurge on everything, from real estate to automobiles, with abandon. And things can get worse — whether it is commodity prices like metals and minerals or crude oil, nothing is likely to cost less, at least in the short term. In fact, the RBI has already warned of “hidden inflation” waiting to surface — in the form of a hike in petrol and diesel prices.

The government has been waiting for the state elections to get over; and a fuel hike is expected to be announced soon after the Assembly poll results are out. The government is yet to visibly demonstrate that it is serious about tackling the problem — at least on the food front. If the prices of food, vegetables and fruits remain high even when there is a good monsoon (such as last year), what should we expect if this year’s monsoon is not as good as it was in 2010? There is something very wrong in the handling of the economy. There is little time left: unless the government gets its act together swiftly, and works decisively to tackle the question of rising prices, the middle class and the poor are in danger of getting crushed by inflation.

Deccan Chronicle, May 5