ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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How RBI Has Missed the Bus

Growth versus Inflation

The Reserve Bank of India has at last reduced its discount rate at which it repurchases government securities from the commercial banks, the repo rate. The reduction, however, has been very small and has come very late. In pursuit of a notion of central bank independence, the RBI has taken steps that have contributed to a decline in investment and a slowdown in growth. It is time the central bank accepts once again that one of its main roles is to maintain the fl ow of credit to the productive sectors.

The Reserve Bank of India (RBI) may take pride in claiming, even if in jest, that it has prevented a “big bang collapse” and that in pursuing higher growth and lower inflation, it has reduced the repo rate and cash reserve ratio (CRR) by 0.25 percentage point each in its latest policy statement of 29 January 2013 (RBI Post-Policy Conference Call for the Media). However, it is not surprising that the domestic financial markets have uniformly reacted adversely to the measures on the ground that the RBI policy correction was too meagre and that it has come a long time after the economy had slipped into a morass of depressed business conditions. The RBI’s record in balancing growth and inflation has not been the result of narrowly focusing on interest rates and targeting inflation but by applying a broader vision, befitting a developing economy, of balancing multiple goalposts of growth, stable prices, external balance and financial sector stability – all mediated by supplying appropriate levels of bank credit and their distribution across productive sectors at a reasonable interest cost. Such a vision has helped the central bank weather strong external shocks such as the petroleum crisis in the 1970s, the east Asian crisis of 1997 and even the latest 2008 global financial crisis.

Fever of Independence

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