RBI asserts autonomy
The near-simultaneous hike in interest rates by several central banks, seven at the last count, indicates inflation is now the top priority for banking regulators. Increased autonomy, which central banks have attained in most parts of the world, have given them leeway to resist political pressure to hold interest rates down. That is true for India as well. Governor Y V Reddy’s lasting legacy is likely to be a far higher level of institutional independence. The PM’s economic advisory council has welcomed the latest hike in the repo and reverse repo rates, but the finance ministry and the RBI have not always seemed to be reading from the same page in the past. The RBI has rightly not allowed itself to be influenced by the possible impact of its move on the stock markets. Mr Reddy had been widely expected to hike rates in April, but chose not to. The smart money is on another hike in July, though our view is that the RBI will make up its mind closer to the event.
Mint Street can be faulted, however, on its lack of communication. The trend is for central banks to explain in some detail the rationale of their action and to provide guidance for the future. Unlike other central banks, the RBI’s move was not anticipated. Its terse communication on Thursday night keeps markets in a state of suspense as to its future intention. That is undesirable. However, enough has been going on in the real economy to justify the RBI’s move. GDP for FY06 at 8.4% was higher than previous estimates, while growth in the last quarter crossed 9%. WPI inflation has risen to 4.7% at the end of May from 3.2% at the beginning of April, and will rise further once the latest fuel price hikes are factored in. The weakening rupee must have been another consideration. The ABN Amro India Purchase Managers Index, an indication of manufacturing activity, was at an all-time high in May. The rate hike, operating with a lag, is likely to slow down demand for housing and consumer durable loans. This coupled with the negative wealth effect caused by the market crash may help deflate the property price bubble, something which the RBI has been wanting to do for a while.
-- The Economic Times Editorial
Mint Street can be faulted, however, on its lack of communication. The trend is for central banks to explain in some detail the rationale of their action and to provide guidance for the future. Unlike other central banks, the RBI’s move was not anticipated. Its terse communication on Thursday night keeps markets in a state of suspense as to its future intention. That is undesirable. However, enough has been going on in the real economy to justify the RBI’s move. GDP for FY06 at 8.4% was higher than previous estimates, while growth in the last quarter crossed 9%. WPI inflation has risen to 4.7% at the end of May from 3.2% at the beginning of April, and will rise further once the latest fuel price hikes are factored in. The weakening rupee must have been another consideration. The ABN Amro India Purchase Managers Index, an indication of manufacturing activity, was at an all-time high in May. The rate hike, operating with a lag, is likely to slow down demand for housing and consumer durable loans. This coupled with the negative wealth effect caused by the market crash may help deflate the property price bubble, something which the RBI has been wanting to do for a while.
-- The Economic Times Editorial
posted by Loco at Wednesday, June 14, 2006
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