Double Barrel Duvvuri

RBI is betting on growth but inflation is a concern.

Reserve Bank of India Governor Duvvuri Subbarao, a Finance Ministry veteran, knows the balancing act only too well. Having helped steer the Indian economy through a very troublesome period immediately after he assumed charge in 2008, Subbarao’s latest monetary policy review last week demonstrates the Governor’s astuteness in trying to achieve the twin objectives of boosting growth and anchoring inflationary expectations. Surprising the markets, he announced a 0.75 per cent hike in the cash reserve ratio (CRR), the amount of cash banks must park with the RBI, while leaving key signal rates like the repo and reverse repo rate unchanged. The result is simple: as much as Rs 36,000 crore—about half the liquid money sloshing around in the system—will be sucked out by the two-stage CRR hike, but the interest rate regime is unlikely to change just now. Simply put, it means your interest rate burden is unlikely to increase, and corporate funding will also not get costlier. The message from Mint Road is that inflation does threaten to become a problem, and excess money must be taken out of the economy, but the growth momentum of an economy just beginning to recover from the shocks of a global downturn must not be disturbed. Clearly, Subbarao is betting on growth and does not want to upset the party. But inflation remains a big concern. Says Indranil Pan of Kotak Mahindra Bank: “The CRR increase was possibly motivated by an increasing confidence of the RBI in the growth dynamics, even as it recognises the possible downside risks to growth from global economic conditions and the fact that the recovery till now is still skewed.” Soaring oil prices, poor monsoons in 2010, and capital flows will only add to the inflation problem. Even as Subbarao remains optimistic about better GDP growth this year, the big challenge for the RBI in the coming days will be to ensure inflation does not upset that calculation.

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Sourav Majumdar