An eye on growth

As expected,the Reserve Bank of India raised interest rates by 25 basis points on Tuesday. It also pulled back its forecast for the current fiscal year to 7.6 per cent. However,the central back indicated that it would put on hold further rate increases as it expects inflation to start easing December onwards. This is a decided shift in tenor,coming as it does along with the 13th hike since March 2010. And even as the RBI lays strong emphasis on the indicators of a slowdown,domestic and global,this weeks tightrope act revives the debate on how to address concerns about inflationary expectations and lagging economic growth.

For most of those 13 rate hikes,the decision must not have been an easy one. During this period inflation has hovered at levels outside the comfort zone,making a case for raising interest rates. Yet,with the overlap of tapering investment,poor business sentiment and increasing global uncertainty,higher interest rates come with economic consequences. Similarly,persistently high inflationary expectations impact business sentiment,making a growth-centric case for the central bank to show it has a grip on rising prices and wages that is higher interest rates. But with the monetary policy transmission mechanism as weak as it is in India,and with much of the food inflation on account of supply-side factors,there have been equally cogent arguments that the country may be better served by an impetus to growth that is,lower interest rates. Finding the right balance is a work in progress,and at each moment is contingent on the circumstances as they obtain at that point.

Many factors spurring inflation at the moment are,in any case,outside of the RBIs control most specifically,the runaway fiscal deficit and the governments delay in undertaking agricultural reform. The RBI seems to say that,while it has done its bit by hiking rates,the ball is now in the governments court. Fiscal discipline and quicker reforms are essential to curbing inflation as well as reviving growth.