FE Editorial:Rate radicalism No time for stodgy monetary policy

INFLATION, at 6.38%, is one of two numbers—the other is current account deficit, analyzed in the second editorial—at hand just as the year starts. Rapid fall in inflation looks to be a trend now and policy must anticipate this. Therefore, RBI should be looking at significantly low inflation a few months down the line and change its policy rates accordingly. There have been reports that RBI wants to be conservative about rate cuts. There has been analyzes, including in these columns, that yield on government bonds are signaling a substantially lower rate regime. And there have been recommendations that banks must be made to feel that on liquidity there will be overcompensation. RBI probably feels that having brought call money rates within the repo and reverse repo corridor and cut its policy rates, moderation is the best response. But that’s wrong because the key problem with the economy right now is investment and business climate. There are any number of fundamentally healthy companies that can expand under a friendly bank lending regime. This calendar year can see India outperforming expectations if it starts with radical rate revisions. That will allow the government greater persuasive powers vis-a-vis banks’ preference for lazy banking.

There’s an argument that RBI shouldn’t exhaust its rate cut potential early because a potentially difficult economic near future may call for action. That may be true but policy rates in India even now are high enough to allow for a radical cut now and still leave room for more cuts. Look at this way: lending rates indicated by PLR still average around 1213% and that’s not a range suitable for an economy that wants to, and can, grow at a rapid clip. In all the sophisticated debate about monetary policy, the costs of India staying off the 8.5%-9% trend growth path are forgotten. A decade of growth in this range—the growth can be higher but let’s be conservative—can, simply put, change the country. India will look as transformed as China does but with a couple of institutional advantages over China. Governments should never forget this big picture. If there’s anything 2008 taught Indian policymakers, it is not the virtues of public sector banking but the folly of central banking that doesn’t make growth a part of its agenda.