Economy
Repo rate hike cannot act as an effective measure in taming inflation

The war against inflation needs support of government, which needs to reign in fiscal deficit, improve supply of foodgrains and needs to desist from taking populist measures

The Reserve Bank of India (RBI) took the financial markets by surprise when it decided to increase the repo rate by 25 basis points in its mid-quarter policy review. What has surprised market experts even more was the fact that Raghuram Rajan, the new governor of RBI, continued the legacy of his predecessor much against the expectation that was built in the market before the policy announcement. While the repo rate increase had a surprise element in it, what has surprised more is the continued belief of RBI in monetary policy acting as an effective tool for containing inflation.
 

The RBI governor was categorical in his statement that inflation control is the most important agenda for the central bank. RBI has been fighting against inflation for a long time with limited results. There are two basic flaws in RBI’s approach towards containing inflation.
 

The first flaw is its obsession with Wholesale Price Index (WPI). WPI is a very misleading number, as the majority of Indians are not impacted by it. In fact, WPI is a myth as far as the common Indian household is concerned. The Indian consumer is hardly impacted by WPI, as there is a big gap between retail price and wholesale price. It is possible that when wholesale price appears to be in control, retail price will not actually be in control. The policy measures should be focused on a more broad based retail price index, which is much broader than the existing Consumer Price Index (CPI). Unfortunately, this is not the case and RBI’s obsession with controlling inflation gets reflected in the fact that it always analyses effectiveness of policy measures with the changes in WPI numbers. There is an occasional mention of containing CPI with emphasis on food inflation.
 

The second flaw in RBI’s approach towards inflation is the conviction that repo rate is an effective tool to contain inflation. Does repo rate always help in containing inflation? Is inflation a purely demand-push factor? Can it be controlled without managing supply side constraints? How can repo rate be effective if international crude prices go up? Also, with ever-increasing wages in rural areas supported by government policy measures and in urban areas because of ongoing business activities, is it possible to arrest the rise of inflation? Can RBI control inflation, when the government decides to give semi-annual dearness allowance hike of 10% to its more than 50-lakh employees, thereby adding substantially to purchasing power?
 

The flaw in the RBI policy can also be analysed by looking at the most core concept of inflation, which is food inflation. Food inflation is a predominantly supply side issue. We need good crop harvests to control food inflation and repo rate hike cannot be effective here.
 

Another flaw in RBI’s usage of repo rate as a policy measure to contain inflation can be understood from the data released by RBI from time to time. Let us look at the data below:
 

Repo rate and WPI do not move in tandem. Inflation is driven by a set of macroeconomic factors, both from demand side and supply side. There have been instances when inflation has gone up despite RBI increasing the repo rate. In April-October 2008 phase, the WPI number went up even though RBI increasing the repo rate. It did come down after that not because of increase in repo rate. This happened predominantly, because of the global slowdown and the softening of commodity prices, including crude prices. Inflation  again started picking up post July 2009 when the government tried to revive the Indian economy through a series of stimulus packages. The RBI reacted by increasing rates and 13 consecutive rate hikes were done which stifled economic growth.
 

Inflation cannot be controlled by monetary policy measures alone if other issues such as supply side constraints, fiscal policy measures and global economic environment are not conducive for it. The war against inflation needs support of government, which needs to reign in fiscal deficit, improve supply of foodgrains and needs to desist from taking populist measures. Protecting Indian economy from vagaries of international economic movements has to be part fighting inflation. If RBI continues to operate with the noble intention of containing inflation with inappropriate policy measures, we will end up having a high interest rate, low rate of economic growth and a potentially, higher than required inflation. It is time to rethink effectiveness of repo rate hike as a policy measure.
 

(Vivek Sharma has worked for 17 years in the stock market, debt market and banking. He is a post-graduate in Economics and MBA in Finance. He writes on personal finance and economics and is invited as an expert on personal finance shows.)

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COMMENTS

Dhiraj Kumar Meena

3 years ago

w'll that graph you have shown actually reflect that hike in repo rate was actually able to pull inflation down, though, with a lag of couple of quaters, which is typically expected from such a hike.

REPLY

vivek sharma

In Reply to Dhiraj Kumar Meena 3 years ago

Read the text below graph to understand the graph.

SuchindranathAiyerS

3 years ago

The difficulty is that the Reserve Bank of India is more a Congress Larifundi like any other PSU. The Repo Rate hikes are far too little too late. It should have been at 11 to 12% three years ago if the RBI was a serious central bank and monetary authority. In classic Indian style, there has also bee a "Animal Farm" Constitutional dilution of its role in "checka dn balances" by including "Economic Growth" as one of its objectives (!) As a result we have before us a Hawthorne Effect where, having administered aspirin to heal tuberculosis (Govt Profligacy) and dengue (Govt Corruption), we are dismissing medication as inconsequential. Having assiduously corroded all institutions through amending laws to convenience and professionalism by replacing integrity and competence with sycophancy and corruption since 1947, we will next say that Central Banking does not work or that "Rule of Law" is a contradiction in terms!

Java

3 years ago

Good observations, but likely to fall on deaf ears. Such increases have only put a brake on growth, without doing anything for the inflation, caused by high oil prices and also by the high fiscal deficit caused by populist policies, which have in turn inflamed inflation by pumping high liquidity into rural areas. RBI should have learnt from the lack of correlation between the interest rate and inflation rate at least by this time. Unfortunately, old habits die hard and the RBI continues to flog a dead horse. It should give a fillip to the economy by reducing the repo rate substantially. The govt should support savings by doubling the tax free interest limit. But saying all this is futile, because vinaashkaale vipareet buddhi.

Did the elephants die in vain?

The Forest Department in Mysore has a mammoth task on hand - that of destroying around 9,443kgs of priceless ivory and trophies of elephants, seized over the past 40 years from poachers and smugglers

Something is seriously wrong with our Ministry of Environment & Forests (MoEF). The Forest Department in Mysore has a mammoth task on hand - that of destroying some 9,443kgs, yes, you read it right, 9,443kgs of priceless ivory and trophies of elephants, seized over the past 40 years from poachers, smugglers etc.

 

Thankfully, due to the timely intervention by GS Prabhu, principal chief conservator of forests (wildlife), the chief conservator of forests in Mysore has been requested to permit Prof Raman Sukumaran, chairman of Centre for Ecological Sciences, IISc, to conduct a scientific research on these ivory tusks.

 

According to the information available, Prof Sukumaran will be able to take thin slices of these tusks to enable him to carry out scientific experiments to assess the habitat of elephants, what they were eating, dietary history etc. This process may probably take a few years to complete.  In order to do so, the Forest Department will issue suitable licence under the Wildlife (Protection) Act 1972, and store the slices in IISc (Indian Institute of Science) Labs.

 

In the meantime, several defence units, including Punjab, Madras and Rajput Regiments, Army workshops and Air Force Units have requested if they can be allowed to display some of these ivory tusks and trophies. The department is also planning to give away some of these to government departments and Museums for display.

 

Rest of the ivory tusks and trophies will have to be kept in various secret locations in the country, as apparently, Prof Sukumaran and his team will have to carry out their studies on the annular rings on the ivory.

 

After this, if there are no other impediments, the task of destroying them and burning down to ashes will be undertaken by the Forest Department! What a tragedy and ironic situation at the same time.

 

The Wildlife (Protection) Act 1972 was introduced to protect selected species of wild life because of reckless poaching and killing before this period. The introduction of this Act in 1972 did not altogether stop this atrocity, as poaching continued due to smuggling of ivory and other items like tiger skins etc. But after the international uproar, traffic in ivory has reduced to a great extent.

 

In fact, in many countries, particularly in Africa, when ivory consignments are seized, they are destroyed to stop this illicit trade and to protect wildlife. Elephant population is rapidly coming down in most countries due to the wanton acts by poachers.

 

Should India follow suit and destroy some 9,443kgs of ivory tusks and trophies, seized over the last 40 years?  Can we imagine the thousands of elephants that have been killed to obtain the priceless ivory?  Should we accept the fact that these elephants have died in vain?  Can we not put this ivory and trophies to better use than destroying them to ashes? This is a debateable issue.

 

We feel that once Prof Sukumaran has taken his slices for tests, these ivory tusks should be given to highly qualified and experienced artisans to work on them, carve and produce exquisite pieces of art, for sale to International Museums and other places of art for display, all over the world. The sale proceeds thus obtained should be used for protection of elephants and creating special areas for their habitat.

 

Destroying these ivory tusks and trophies should be prevented at all costs. 

 

UPDATE: Following clarification from Sampat Singh Bist (Former Director, Project Elephant, Govt of India), we rectified the ivory stock figures to 9443kgs. -MDT

 

(AK Ramdas has worked with the Engineering Export Promotion Council of the ministry of commerce. He was also associated with various committees of the Council. His international career took him to places like Beirut, Kuwait and Dubai at a time when these were small trading outposts; and later to the US.)

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COMMENTS

ABHA CHAWLA MOHANTY

3 years ago

IS ACT FOR WILDLIFE PROTECTION REDUNDANT WITH EXIT OF MADAM MANEKA GANDHI?? MADAM J.NATRAJAN A REMINDER,,, NEEDS AGGRESSIVE , POLICING.,,,,,,,

Dr Anantha K Ramdas

3 years ago

I would like to thank Mr SS Bist, Former Director, Project Elephant, Government of India, for pointing out the error in the quantity of tusks and trophies of elephants held by the Forest Department. This has been corrected, immediately, upon his advice to 9443 kgs.

Because of the international ban on ivory sales, and in order to prevent further poaching and killing of these magnificent animals, sadly, these tusks are to be destroyed, as per Mr SS Bist.

Personally, I feel that the least we can do is to distribute these ivory tusks to museums all over the country and those outside, if they wish to display the same.

Destroying them would wipe out any evidence of the fact that such large tuskers lived in India! Hope Government would reconsider the decision.

Sampat Singh Bist

3 years ago

Mr Ramdas has got his figures wrong. The ivory lying in the custody of Karnataka Forest Department is only about 9443 kg and not 9000 tonnes as claimed. The carving and selling of ivory within the country is legally prohibited. international trade in ivory is also banned. Therefore, the question of handing over this ivory to the carvers does not arise. Very small quantity of ivory is needed for research. The rest must be destroyed. Permitting the ivory trade to reopen in the country means exposing our magnificent tuskers to serious risks of poaching. Ivory looks better on tuskers and not on human-beings. S.S. Bist (Former Director, Project Elephant, Govt. of India)

Typhoon Usagi leaves 25 dead in China, chaos at Hong Kong airport

Bullet trains from Guangzhou city to Beijing are suspended.  Winds were strong enough near Shanwei to blow cars off the road as Typhoon Usagi, the world’s most powerful storm this year, hit China

Typhoon Usagi has killed at least 25 people after crashing ashore in southern China, throwing the region’s transport systems into chaos and leaving tens of thousands of airline passengers stranded in Hong Kong.

 

Schools and businesses were shut as activity in the normally teeming financial hub slowed to a crawl after Usagi punched a long swathe of Chinese coast with torrential rain and winds of up to 165km (103 miles) per hour during the night.

 

The deaths were reported by Chinese state media after Usagi, which meteorologists say was the world’s most powerful storm this year, made landfall in Guangdong province northeast of Hong Kong yesterday evening, prompting the highest level of alert from the National Meteorological Centre.

 

The reports by Xinhua news agency and CCTV did not say how the 25 people were killed but said all the deaths were in Guangdong after the typhoon brought down trees and damaged roads.

 

Bullet trains from Guangzhou city to Beijing were suspended and Xinhua said that winds were strong enough near Shanwei to blow cars off the road. More than 47,000 fishing boats were in harbour and schools were closed in 14 coastal cities.

 

Usagi had previously killed two people in the Philippines and unleashed landslides and power outages across southern Taiwan at the weekend as it ploughed through the Luzon Strait with ferocious winds and heavy downpours.

 

Monsoon rains exacerbated by Usagi brought flooding on today to the Philippines capital Manila and nearby provinces.

 

As the typhoon bore down on Hong Kong, operators shut down one of the world’s busiest sea ports and nearly 450 flights were either cancelled or delayed as Cathay Pacific and other airlines imposed pre-emptive suspensions.

 

The Observatory said it was the strongest typhoon to brush Hong Kong since 1979. Tens of thousands of people had their travel plans upended with ferries and trains also disrupted, while Cathay said it expected flights to start resuming only from noon (0400 GMT) on today.

 

Many passengers were milling around Hong Kong airport hoping to rebook their flights, but hand-written signs in Chinese and English warned them that there was little chance of getting standby seats on flights out today and to check back later.

 

Officials in Hong Kong, which is well versed in typhoon preparations, said that 13 people were injured during the storm, while more than 60 trees had fallen.

 

Major thoroughfares were empty and signboards swayed in the wind early today, but some residents ignored official warnings and headed out to the coastline in raincoats to brave the wind.

 

Last week, Usagi killed three people in Vietnam.

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