Latest Post :
Home » , , » RBI: Accounting and accountability

RBI: Accounting and accountability

Written By Admin on Thursday, 7 June 2012 | Thursday, June 07, 2012

: RBI hiking rates 225 bps didn’t do that much to control inflation but managed to bring IIP growth to negative territory

By now it is established wisdom that the UPA government at the Centre massively messed up in its handling of the Indian economy. An equally established consensus is that the UPA government was solely responsible for the decline in GDP growth to heretofore unimaginable levels of only 5.3 per cent year-on-year growth rate observed in January-March 2012. Further, manufacturing year-on-year growth in this quarter was negative for only the second time in the history of quarterly GDP data (since 1996-97). In addition, annual mining growth in 2011-12 was also negative for the first time since 1971.

There are three possible explanations for this growth slowdown. First is the ongoing European crisis — a crisis that has intensified in the last three months. However, the growth data mentioned above ends in March 2012; prior to that, the euro crisis was present, but of considerably lower magnitude. The second explanation is everyone’s favourite — anti-growth and pro-inflation policies meted out by the socialist welfare state at the Centre. The third explanation has to do with the anti-growth policies of RBI. It is this last explanation that is the focus of this article. The question to be examined is whether the 225 basis point hike in repo rates engineered by RBI was warranted. As a background, it is appropriate to note that the Technical Advisory Committee of the RBI advocated a grand total of only 45 basis points (weighted average of all the recommendations) in the entire year. RBI exceeded this advice by 180 basis points. Did such an increase in interest rates have no effect on growth? If it did, was any inflation slowdown achieved to compensate for the sharp fall in growth? These are the questions that deserve an explanation.

There are two concerns a good central bank (GCB) should have — growth and inflation. Further, it is recommended that a GCB should act in a pro-cyclical manner. In other words, when growth is uncomfortably low, it should lower rates to increase demand; when inflation is uncomfortably high, it should raise rates to counter this excess. A GCB spends a lot of time and effort to determine the nature of inflation; in particular, whether it is cost-push or demand-pull. It pays to know in order to understand the potency of interest rates. Rate changes are most effective in a demand world; they are impotent in a cost-push world. 

At the beginning of 2011, RBI was faced with an economy with inflation higher than warranted, and growth at trend. Expectations were that GDP and industrial growth would stay in the 8.5 per cent-plus range,
Share this article :


Speak up your mind

Tell us what you're thinking... !

2500 + Subscribers

Get Toolbar

Get our toolbar!

Read article on Android Phone

Share your file


Get updates on Facebook

Popular Posts

Support : Creating Website | Johny Template | Mas Template
Copyright © 2011-2013. YourKnowledgeportal - All Rights Reserved
Original Design by Creating Website Modified by Adiknya
Blogger Widgets