On 16th July 2012, RBI Governor candidly admitted that India’s inflation is too high for any cut in interest rates to be considered. Current WPI inflation is in the range of 7.25% to 7.75%, while CPI inflation is above 10%. The Governor said that he would like to see the inflation come down below 5% before drawing any comfort on slowing inflation.
We welcome this road map by the Governor. Indeed, he has chosen his battle wisely, albeit he is two year too late and he still has a lot of distance to cover.
Already, negative real rates have incentivized Indians to buy gold to protect the value of their savings in real terms, or to move money into speculative activity, as we have shown recently.
India has witnessed high inflation over the past five years. CPI at around 10% per annum over this period has choked the competitiveness of Indian goods and services exports, leading to the huge current account deficit of more than 4% of GDP. Some unscrupulous vested interests are promoting banning of imports and raising of import tariffs to “solve” the CAD issue. We hope the Government does not fall prey to this propaganda, and in the process hurt the long-term competitiveness of the nation.
RBI would do well to go to the root cause of the high CAD, and make real interest rates in India positive. This will take Indians off the gold bandwagon and also move money into productive, tradable activity, boosting exports in the process.
Maybe, at the same time, RBI can do well to lobby with government to reduce losses of foodgrains (The Government’s procurement and storage policy ensures that India loses one third of its massive food production to rats and rot). This will make more foodgrain available at lower prices for Indian poor, reduce fiscal deficit a bit by controlling food subsidy and also make foodgrain available for exports, helping the CAD.