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RBI failed to read the signals and didn’t withdraw liquidity in time. We are paying the price now: Mythili Bhusnurmath
Last Updated: Jun 01, 2022, 03:54 PM IST
“Had the monetary policy direction changed a little earlier. we might have been a little better off. Today the twin deficits – fiscal as well as the current account – are back with us. In the case of the current account deficit, that is partly because excessively loose monetary policy.”
“There really was no excuse for RBI to look through save for the fact that it was trying to support growth but the problem is growth is ultimately in the government’s court and not in the Reserve Bank’s,” says Mythili Bhusnurmath, Consulting Editor, ET Now
The last comment that we heard from the finance secretary was that enough has been done perhaps on taming inflation both in terms of the RBI measures as well as the steps taken by the government. How should we read into this? Should we expect no further measures? How much credence should we give to that statement?
If you look at his words very carefully, he said enough has been done to curb inflation, So, it all depends on how inflation pans out in the coming months and also what is the cost that we are going to pay for these measures. Remember the measures from the government have implications for government’s revenues. The outcome will be an increase in fiscal deficit, other things remaining the same.
Of course one does not know about the things remaining the same and which is why we saw the official say he does not see any risks that are not already known. The problem is that in today’s world, there are many unknown unknowns. Nobody really anticipated the war in Ukraine to go on for so long, while the oil prices would go up so high.
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Remember the Budget was framed in early February and the oil prices were estimated at $75 a barrel. The Reserve
’s monetary policy statement in February and subsequently in April, all completely failed to read the warning signals and this is because there is so much uncertainty. I am not very sure that the government has done everything that it could do in the sense that it has done a great deal but whether this will have the impact of reducing inflation is the big question because inflation is essentially a monetary phenomenon.
The onus for this lies on the Reserve Bank of India, the onus for growth lies mostly on government, partly on RBI. The onus for inflation control lies mostly on RBI and partly on government. So I think the government has done a great deal but we are going to pay the cost and whether this will curb inflation now depends on a whole host of things, partly global and partly domestic and today we are paying the price because the RBI failed to read the signals and failed to withdraw liquidity sufficiently early. It is largely the result of excess liquidity driven also by geopolitical tensions.
That explains why we are in this situation but every situation has a solution and the directions are right. We have cut excise duty on crude, RBI has shifted its stance and raised rates faster than anticipated. A lot of other things are being done to control inflation. On the other hand, global commodity prices are starting to fall, export duty on steel has been imposed…are we in the right direction?
We are not in the wrong direction. We are proceeding in the right direction. Had the monetary policy direction changed a little earlier. we might have been a little better off. Today the twin deficits – fiscal as well as the current account – are back with us. In the case of the current account deficit, that is partly because excessively loose monetary policy.
So yes we have made a beginning but we have a long way to go. As you said, every problem has a solution but every solution also has a price. Are we willing to pay the price? Did we have to pay such a high price? There are a large number of people, myself included, who feel that maybe the price need not have been so high, had we read the writing on the wall six months earlier.
Given the fact that rupee is also trading near the record low levels of 77.71, that also remains an important mark but other talking point as far as macro economy is concerned is the RBI meeting which is lined up on June 6-8. The market is already pricing in that there is going to be a 40-50 bps rate hike. What are the other things that you would watch out for?
I would imagine that the RBI would revise both its inflation estimate for the year as well as the growth estimates. We have encouraging numbers for GDP because prima facie the numbers are encouraging. It is the highest growth in close to two decades, it was almost the highest amongst all major economies but if you look at closer and behind the numbers, then you will see a great deal has been driven by base effects and which is why we saw that every successive quarter of the last fiscal we saw growth coming down simply because the base effect is failing.
So recovery is happening but recovery unfortunately has been nipped in the bud partly because of external reasons and partly because the easy monetary policy which earlier was promoting growth has now come back to haunt us in the sense it is now becoming an impediment to it. When inflation continues for so long and at such a high level, it ultimately impedes growth by holding back private investment – not that we have seen much private investment in the past. But also because when the government is unable to spend on essential capex because it is doing these tax giveaways, then it is also going to hurt growth.
So the problem is that inflation ultimately hurts not only the poor but also growth at the macro level. We will have to see what the RBI does. That it will increase rates is a no-brainer but how much, is a question of debate. But we must understand that whatever the RBI does now, it will take time to have an impact. As of now, we will have to live through the pain and that perhaps is something that we could have avoided.
I will grant that wisdom in hindsight is always 20:20 but this is not entirely hindsight. Many observers had talked about RBI’s monetary policy being excessively loose for too long. Remember unlike the west, where inflation is a relatively new phenomenon, in India we have seen high inflation right from 2020-2021. There really was no excuse for RBI to look through save for the fact that it was trying to support growth but the problem is growth is ultimately in the government’s court and not in the Reserve Bank’s. That is where we thought we made a mistake but of course mistakes can be corrected but there is a price to pay.