RBI governor sticks his neck out. Its now over to the govt to address policy paralysis Springing a surprise on the markets,Reserve Bank of India Governor D. Subbarao slashed the repo rate the rate at which banks borrow from the RBI by 50 basis points to 8 per cent. This is the first rate cut since April 2009,and no doubt,the best that he could have done to decisively shift the monetary policy stance from that of controlling inflation to spurring growth. Thirteen rate hikes between March 2010 and October 2011 have slowed down the economy,with the growth rate in the third quarter of 2010-11 dropping below the post-crisis trend rate to a two-year low of 6.1 per cent. Surely,the RBI must have closely analysed the trajectory of inflation,and specifically,non-food manufactured inflation that has continuously dropped over the past four months to 4.7 per cent in March,to conclude that it was time to send a strong signal to corporates to get back to investing,adding jobs and aiding growth. Subbarao deserves praise for sticking his neck out with a sharper 50 basis points repo rate cut when the market was not expecting anything more than a token reduction of 25 basis points. But,in this bold act,the government or the finance ministry must not fail to appreciate the faith he has reposed on its Budget 2012-13 projections of an expenditure control programme to rein in the fiscal deficit. Of course,the RBI must have also thought through the consequences of a pick-up in demand and its effect on prices. In fact,the RBIs own inflation projections for the full year indicate that the wholesale price index-based inflation will again touch the double-digit mark in September. Reversing the policy stance then will only fly in the face of the central banks credibility. Not surprising,therefore,was the palpable undertone of urgency when the RBI clearly indicated that another rate cut this year was unlikely because of persisting upside risks to inflation. Its over to Finance Minister Pranab Mukherjee now. He has to create more headroom if he wants the RBI to repeat its act. Mukherjee has to work on his persuasion skills to make the allies see the reason in allowing a gradual deregulation of petroleum product prices,especially diesel. Crude,hovering at around $120 a barrel,will keep adding to the governments subsidy burden. The clock will start ticking for Mukherjee the moment the budget session of Parliament ends. Creating a good investment climate requires more than getting the interest rates right.
