Tuesday, April 20, 2010

Attacking inflation- Central Banks know it all

The Reserve Bank of India did the expected. Tinkered when it is not required. Still under a delusion that it can control inflation by simply moving some ratio by a quarter of a percent.
The RBI fails to recognise that the real issue facing the Indian economy is one of a supply constraint. Across industries, the capacities have not moved up to cater to the growing consumerism fuelled by loose monetary policies.
Across service industries we have the phenomenon of high levels of attrition caused by 'salary' shopping done by the young urbans. For them, a couple of thousand rupees a month means a change in lifestyle. And in a land where quality of manpower is in short supply, job hopping is the order of the day.
Easy money, credit write offs and schemes like the NREGA are putting in enormous spending power in to people's hands. The increase in money supply is simply chasing the stagnant supply.
In such a situation, even if RBI were to hike interest rates by a few more percentage points, it will not reduce consumer spending. And with consumer activism to the fore, it is no longer a shame to default, with courts also taking the sides of the defaulter. To be a lender, is to put oneself in a very weak position. Whether you are lending to a large corporate or to an individual. Defaulters are looked upon with sympathy and given shelter.
In such an environment, simply making money costly is not a solution.
Maybe, the RBI ought to rethink on selective credit pricing. Maybe an infrastructure project can be funded at a lower rate. Maybe a personal loan can be made more costly. Maybe loan recovery is not perceived upon as a 'sinful' activity.
Alas, the central bankers live in their own paradise surrounded by pillars of history.
The RBI says that it expects inflation to come down. So am I and so is everyone. If it is true, what is the point in a cosmetic change of a quarter of a percent? And that too at a time when the Indian banks are sitting on a few thousand crore rupees of excess liquidity that is parked in to liquid funds, with mutual funds? The bankers are shy of lending. We will soon come to a half way mark, where the bank chairmen will start pushing their people to meet their 'loan' targets. And lending will become reckless. Nothing changes.

1 comment:

Rajiv Shastri said...

That's one aspect that I didn't this of at all. While I was raving and ranting about the futility from a monetary theory perspective, you connected the dots to give a more reality based perspective. Hats off, sir!