Walking on the tight rope


An inspiring economic attribute has come up on the anvil—consumer or retail inflation is currently clocking at 3.17 per cent. It is said to be the lowest since the Central Statistics Office began declaring consumer inflation numbers from January, 2012.

However, there remains a crucial rider, which states that apart from the food items segment of inflation, prices of the whole gamut of industrial items have not registered any price decrease. Additionally, estimates indicate that net inflation is poised to witness a northward trajectory in the coming days. Perhaps, on anticipation of such a situation, the Reserve bank of India (RBI) refused to reduce the country’s nominal interest rate in its latest Monetary Policy Review.

Prices of goods and commodities are a particularly sensitive issue in India, as they are within the most political jurisdictions. It is one crucial aspect whose unwarranted tendencies could spark social dissatisfaction and its attendant undesirables. If not managed properly, it encourages heated exchange of words among the political rulers and opposition. The aftermath is a social unrest of sorts, consumer resentments and producer anxiety, although producers are those whose surplus values have scope for increase during price rises.

Nevertheless, even that is akin to a situation of Pyrrhic victory as those who are producers for a particular commodity, could well be consumers for another. To be able to retain the economic equanimity of the country, to the extent it could, the RBI, possibly, decided to hold the leash on interest rate levels.

The country follows a Managed Floating Exchange Rate and allows for high levels of capital mobility across the nation’s borders. In such a paradigm, the central bank usually does not attempt to artificially direct the level of currency exchange rate by selling or acquiring foreign exchange reserves. Therefore, had the RBI reduced the nominal rate below the prevailing 6.25 per cent, there would have been increased borrowings, giving rise to potential investments.

But, with a lower interest rate, many investors who had parked their capital here would have been encouraged to remove it to, figuratively speaking, where the grass looked greener. The rupee would have been subjected to further depreciation. But, with a more reduced value of the rupee, exports could have increased and imports somewhat decelerated. The altered economic scenario would have concluded at that.

But, with an already lukewarm industrial production having contracted further by 0.4 per cent than before, the necessary expansion of exports to eclipse the imports volume would not have been attained. Crude oil prices are coming to an end of its slack era. Global crude oil prices have increased in the last two months by about 14 per cent. Low prices of crude oil were a major constituent, which kept the debit entries in the country’s balance sheet much lower than they would have been otherwise. That period seems to be concluding.

The rupee’s exchange rate is Rs 67.2/US dollar. It is expected to weaken further to Rs 69.5 in about a year. That would put greater pressure on the imports bills in future. Nonetheless, a weaker rupee could increase the scope for organised Foreign Direct Investments (FDIs), which the government is assiduously trying to bring in.

The full effect of demonetisation is still at large, despite government pronouncements on the positive. But, the rise of the country’s exchange rate shows that indigenous exports need to be increased significantly. For that, the economy has to effectively pull itself out of loan defaulting and industrial laggardness.

A one data point inflationary decline is not an occasion for unrestrained satisfaction. With possibilities of a net inflationary rise, the RBI could keep possibilities of reduction of the repo or nominal rate in abeyance. Investments and income levels, on net, would possibly walk on the tight rope.

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Topics : #business | #opinion

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