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Credit Policy Review: Economists Believe RBI Governor Duvvuri Subbarao Has No Choice but Raise Repo..


Date: 16-09-2011
Subject: Credit Policy Review: Economists Believe RBI Governor Duvvuri Subbarao Has No Choice but Raise Repo.
MUMBAI: Damned if he does, damned if he doesn't. Reserve Bank of India governor Duvvuri Subbarao is caught between a rock and a hard place.

As he prepares to unveil the central bank's mid-quarter monetary policy review at noon on Friday, he must wish the choices before him were easier. Slowing demand for goods and a moderation in the economic growth rate call for a pause in more interest rate hikes. But soaring prices dictate that the cost of money rise to cool demand further.

Should Subbarao's priority be to curb rising inflation in the larger interests of the population that is seeing more of its income eaten away by higher prices? Or, should he rather please investors whose wealth erodes due to higher rates? Prudent economics and the central bank's mandate make a strong case for the first argument, but market sentiment is not something central bankers today can be oblivious to.

As he wrestles with these dilemmas, the dominant view is that Subbarao will choose to increase rates - for the 12th time since March last year - by 25 basis points in the mid-quarter monetary policy review on Friday for sustained long-term growth.

Sixteen of 20 economists polled by ET said they expected the central bank to raise the repo rate, the rate at which it lends to banks, by 25 basis points to 8.25%. The reverse repo, the rate it pays banks for deposits, may go up by the same extent.

Even so, there is a minority view, albeit from influential quarters such as Goldman Sachs and the State Bank of India, that the governor could press the pause button on rates this time and cash and liquidity reserve ratios may also remain unchanged. Subbarao may declare again - the second time in 10 months -his intention to pause and watch the direction of the economy amid a worsening global crisis. Although clearly a minority view, it may have influential backers in the government as well.

"Given inflation is still very much on RBI's priority, we don't see a pause at this time," said Abheek Barua, chief economist at HDFC Bank. "Also, if you see the indirect indicators like excise collections, you would find that growth has not dramatically collapsed, it has just moderated." If the RBI's governor's past utterances are any indication, the hawkish stance on inflation will remain.

"Notwithstanding signs of moderation, inflationary pressures are clearly very strong," he had said during the first quarter monetary policy review on July 26. "The current balance of global and domestic factors suggests that monetary policy needs to persist with a firm anti-inflationary stance."

The global economic crisis has worsened since, and so has domestic inflation. Greece is on the verge of default. Germany and France are scrambling to save the European monetary union that may be under threat as sovereign default risk spreads to Portugal, Ireland and Spain. In the country, inflation acceler-ated to more than a 12-month high in August at 9.78%, a level that finance minister Pranab Mukherjee called 'perilous'. Food inflation rate remained above 9% for a sixth straight week at 9.47% in the week ended September 3.

Source : economictimes.indiatimes.com

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