The central bank and banking regulator of India, Reserve Bank of India, came out with its FY 2012-13 (April 2012 to March 2013) quarter review of monetary policy.I contributed an editorial on the RBI review for the newspaper I work for.
Here is what I wrote:
The government has itself done hardly much on the real macro-economic problems of high fiscal deficit and high current account deficit. Raising diesel prices by a meagre Rs 5 and putting a cap on subsidised domestic cooking gas cylinders will hardly make a dent in the rising fiscal deficit. These measures too came belatedly after all earlier political compulsions arising from state elections and presidential elections had expired.
A fiscal roadmap laid out by the finance minister on Monday is welcome but without detailed plan of action on individual subsidy items it is only a promise and meaningless at that since the approaching 2014 general elections will soon give re-birth to political compulsions. Moreover, an actual implementation of the fiscal measures will translate into short-term pain of higher inflation as prices will be tuned to market forces.
The RBI has, therefore, done right by not cutting the repo rates at this juncture. Capital investment by corporate borrowers will surely if rates are cut and lead to better economic growth but it will, if inflation does not subside, diminish the inflation-adjusted real rate of return for savers.
India has perhaps the highest number of savers in the world and this fact should not be under-appreciated. It is not wise to assume that the long-term worst-case scenario of severe fallout from a very high fiscal deficit can be reasonably averted if economic recovery happens in the short-term by through low lending rates