Inflationary pressures continue to influence the central bank of the Indian economy. In it’s Second Quarter Review of Monetary Policy 2012-13, the Reserve Bank of India (RBI) has maintained its hawkish stance on inflation and has kept the policy rates (i.e repo rate and reverse repo rate) unchanged. This has no doubt disappointed the government and the banking system of the economy.
But, it is essential to note that the apex bank has acted prudently at the time when it is entangled between rate cut pressures and inflationary pressures. On one hand, the central bank has been facing growing pressures from the government, economists and many industrial bodies to slash down the interest rates. And on the other hand, RBI has been expressing its concerns on the persisting inflationary risks in the economy.
Inflation which has continued to remain above the comfort level of 5%, has stronger impact on the monetary policy. RBI has refrained to reduce the interest rates as the upside risks to inflation remain high due to high rural wages, inadequate supply response in some food articles and short-term pressures from administered fuel price revisions. Because of these upside risks, the RBI has been reiterating that it will focus on its fight against inflation to bring price stability in the economy.
Both the government and the RBI share concerns on growth and inflation. But, the important thing is that the balance shifts to growth for the government and for RBI, the greater balance is shifted to inflation.
Government has initiated some important measures towards reviving economic growth and primarily towards fiscal consolidation by diesel price hikes. After taking into account the whole macroeconomic scenario and the upside risks, the apex bank has projected a growth of 5.8% for the economy, which is lower than its previous estimate of 6.5%.
Government has to do every bit to bolster the economic growth and revive the investment confidence in the economy and at the same time, RBI has to work very meticulously to provide better monetary policy in order to ensure price stability in the market. Government’s recent measures towards fiscal consolidation is yet to provide cushion to the growing risks in the economy. In that case, RBI’s stance on interest rates should be appreciated, as it has clearly mentioned that further rate cuts may be stimulated after there is some respite in the inflation trend.