Two more months? Duvvuri Subbarao’s projection that inflation will turn down in December is oddly specific. The governor of the Reserve Bank of India, after all, has spent much of the past two years reminding everyone of his inability to do anything about structural imbalances in agriculture, infrastructure capacity bottlenecks, distorted administered prices of several key commodities, and the pace of fiscal consolidation – all of which have conspired to keep the country’s headline rate of inflation well above the RBI’s target zone over that period. On Tuesday, the old excuses came out again, as the RBI raised its key interest rates for the 13th time since March last year.
Mr Subbarao is right, though, to call for a little help. The fastest round of rate rises in the RBI’s 76-year history seems to have checked India’s growth, but has failed to make much of a dent in the headline rate of inflation, fractionally lower in September (9.7 per cent) than August (9.8 per cent). For that, some blame must lie with the profligate government. Last year, as Morgan Stanley notes, the state lifted spending by close to 4 per cent of gross domestic product, largely boosting consumption, at a time when credit constraints pulled down private corporate capital spending (read, capacity creation) by almost 6 per cent. Now, faced with falling revenues, the state has lifted its borrowing by 13 per cent for the second half of the current fiscal year.
The governor is certainly not blameless. By raising rates in small increments with almost metronomic regulatory, the RBI has done little to anchor inflation expectations. Revising inflation projections upwards while simultaneously tightening, as he did in July, was another questionable move. Still, while almost every central bank is turning dovish, and while India faces fresh price pressures from a tumbling rupee, a commitment to “concerted policy action” is vital. Are you listening, New Delhi?