Conflicting Signals

<?xml version="1.0" encoding="UTF-8"?><root available-locales="en_US," default-locale="en_US"><static-content language-id="en_US"><![CDATA[CALCULATED MOVES: Through his policies RBI Governor D. Subbarao is trying to strike the right balance between tackling inflation and fuelling growth Unconventional times need unconventional measures. That&rsquo;s the message Reserve Bank of India (RBI) Governor D. Subbarao sent to the economy in his maiden monetary and credit policy review. Unconventional or not, the recent measures taken by the RBI tell one story while statements from the RBI governor tell another. Before he announced the mid-term credit policy, Subbarao allowed banks to avail additional liquidity of up to 1 per cent of their deposits, which effectively amounts to a cut in statutory liquidity ratio (SLR). This, a short-term measure, seems quite disconnected with the long-term objective of the RBI going by what Subbarao said, &ldquo;The&hellip; whittling down of excess SLR investments warrants serious policy surveillance in the context of overall financial stability and the efficiency of financial intermediation.&rdquo; RBI&rsquo;s autumn measures to tide over the liquidity crunch &mdash; cut in SLR, CRR and repo rate &mdash; injected Rs 1.6 lakh crore into the system. But it is being surmised that a substantial proportion of that amount has been used by public sector banks to buy bonds issued by oil marketing firms. So, were the liquidity enhancement measures taken for the benefit of oil companies or banks? Seems like the former as banks&rsquo; credit growth has been robust at 29 per cent (year-on-year) as against RBI&rsquo;s target of 20 per cent. Amidst talk of a liquidity squeeze, the central bank has actually voiced concern over the growth in money supply, which continues to grow 19 per cent against its target of 17 per cent. This, despite significant outflows by foreign institutional investors. RBI says, &ldquo;The policy endeavour would be to modulate the monetary overhang generated by the sustained expansion of money supply since 2005-06. This is necessary in order to ensure that inflationary pressures are not fuelled.&rdquo; Conflicting signals are, perhaps, the result of the tightrope walking that Subbarao is expected to do in a stagflationary situation where growth is decelerating in times of double-digit inflation. What should then be the priority? Fuelling growth or controlling inflation? According to Chanda Kochhar, joint managing director at ICICI Bank, growth is not a very big concern since even at 7.5-8 per cent, India remains one of the fastest growing economies in the world. According to Indranil Pan, economist at Kotak Mahindra Bank, the RBI should be more concerned about inflation. He says, &ldquo;The RBI has maintained its inflation target of 7 per cent by end-March despite a significant correction in global commodity and energy prices.&rdquo; But others such as Tushar Poddar, vice-president, Asia Economics Research at Goldman Sachs, feel that growth concerns will decisively outweigh inflation concerns. He says, &ldquo;The large fall in commodity prices, slowdown in demand, and the extraordinary fall in asset prices suggest that inflation will fall below 6.5 per cent end-March 2009,&rdquo; he says. On the forex front, too, the RBI is under pressure to strike a healthy balance between maintaining liquidity (read growth) and controlling import-led inflation. If the RBI sells dollars, it sucks rupees out, straining domestic liquidity. If it sits tight, importers cry foul. Meanwhile, the rupee has already touched the 50-to-a-dollar mark. Says Rohini Malkani, economist at Citigroup (India), &ldquo;The rupee is expected to remain at current levels until deleveraging subsides and risk levels normalise.&rdquo; While RBI solves the growth-versus-inflation or the short-term against the long-term jigsaw puzzle, there isn&rsquo;t much solace for investors, consumers, depositors who are waiting for the worst to get over. raghu.mohan@abp.in (Businessworld Issue 4-10 November 2008) &nbsp;