Monetary policy – same drug for all diseases

The Monetary policy for this season is out. As expected, Apex Bank has increased the bank interest rates to counter the inflation

It is human nature that, come what may, we do, in fact, we are habituated to do what we know most. It is also human to play safe and tread on a beaten track. The recent monetary policy reflects this mind set. We know and we can understand that it is inevitable but to hike interest rate to bring money back to banks. But, is this only tool that is available in the hands of policy makers to tackle a devil called “inflation”

What is the scenario: The inflation is too high. It shall be brought down.

What is prescribed: To offset inflation, the following is prescribed under the policy:

a) To increase rates of interest

So that deposits will attract money back to banks and it reduces the circulation of money in open market. That increases money value and drives the prices and thereby inflation, down. RBI has done the same. Adjusted the rates of interest on savings

b) To decrease proposed GDP

It is like one step up and two steps back. Even before we actually encounter apprehended problem, one feels, the reduction in GDP targets sends weak signals, which, by looking at the situation, are not really warranted.

Underlying assumptions for policy statements:

a) Good Monsoon, which is beyond our control

b) Stable, more or less, oil prices, which is again contingent

What is the side effect: Increase in interest rates deprives cheaper credit to manufacturing sector and Agriculture sector which is vital to bring prices of commodities down and thereby inflation.

Why fundamentals for this Inflation are ignored: This inflation is not because of excessive supply of money. It is because, lack of supply of agriculture produce. Every one knows that this inflation is the result of the supply side problems. This is another way of looking at the challenge.

What should have been done: Therefore the solution is to provide support to agriculture and increase the production. Increase more credit or cheaper loans to agriculture and soft loans to supply chain issues in the agriculture sector and also to manufacturing sector, which is much needed and long awaited. Further, proper water management, seeds, cold storages, distribution points, supply chain issues etc require lot of support from banking sector. This increases agricultural production and eases pressure on prices. This will also cool inflation pressures.

There is a feeling in some quarters, our apex bank could have little more innovative the way it used to be and paid little more attention to the fundamentals. Instead of examining the nature of inflation, instead of understanding whether is it due to supply side or demand side pressure, it has resorted to interest hike. Is it in sync with our union budget, which, as all of us seen, had treated this inflation as a result of supply side pressure and had aimed at adjusting the same by laying proper emphasis on Agriculture and Manufacture and giving prominence to both the sectors. We shall wait and see.