There are times when what is said becomes more important than what is done. The quarterly review of the monetary policy announced by the Reserve Bank of India (RBI) Governor made no changes to interest rates. But by raising a red flag about inflation, it leaves the door open for a possible tightening sometime in the near future. Such tightening, even if it comes in the next review, would be unfortunate for a number of reasons.

First, RBI has itself been apprehensive about the apparent signs of revival. The pick-up in industrial growth and infrastructure sectors, the revival of the primary and secondary capital markets, the large stimulus provided by the government and its impact on consumption are all good and positive signs that reduce downside risks to growth. However, the optimism is not so widespread or entrenched as to merit tightening. Not just that, the growth rate projections, except for a very optimistic 7.5 per cent from the government, have ranged from 4.5 to 6.5 per cent. We need the lagged effect of low interest rates to show up in economic growth numbers before we think of meddling with monetary easing. Corporate earnings have begun to look up, but borrowing requirements of manufacturing and services have barely been met. The import numbers remain sluggish, placing a doubt on the much-touted revival of the capital goods sector. Growth still has some distance to go, and a lower interest-rate regime should support it until the numbers look sustainably good.

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