Beleaguered households, barely coping with high food inflation and the rising cost of living, have been hit by a double whammy. The Reserve Bank of India’s announcement on Friday raising the repo rate (rate at which banks borrow from the RBI) by a quarter per cent, a day after the government suddenly increased petrol prices by Rs 3.14 litre, will now put a bigger burden on domestic budgets. It is almost a certainty that home loan rates and thus EMIs will go up once banks adjust interest rates, and the petrol hike will also cause downstream inflation.
Aware of the political consequences, the government hastily postponed the meeting of the Empowered Group of Ministers that was to take a decision on curtailing the supply of subsidised LPG cylinders per household to a measly four to six per year. The rest of the requirements would have to be met by non-subsidised cylinders, which could mean paying around Rs 700 per cylinder instead of around Rs 400 at present.
Friday’s rate hike was the 12th such increase in the past 18 months, and yet, according to the central bank’s own view, headline year-on-year inflation rose from 9.2 per cent in July to 9.8 per cent in August 2011. That the RBI persists with raising interest rates even as inflation refuses to be tamed appears perplexing. Something doesn’t seem right, and perhaps something new could have been tried. Brazil and Turkey brought down inflation by cutting interest rates. So far the RBI hikes have only succeeded in stifling growth. Though the RBI’s view seems to be that excluding capital goods, the growth of IIP was higher at 6.7 per cent in July, compared to 4.4 per cent in June, industry says there has been a broadbased contraction in growth and there could be a further slowdown unless some counter-measures are taken. Even the host of approvals announced Thursday, allowing Indian companies to borrow cheaply in yuan and raising overseas borrowing limits, has not really excited the business community. Companies are still holding back on capital expenditure.
These are difficult times, the RBI says, and given the global growth slowdown, no immediate solutions are on the horizon. It also said food prices will not come down as they are driven by a structural demand-supply imbalance. This requires the immediate attention of the government, which the RBI has also faulted for not being able to rein in the fiscal deficit. What is urgently needed is that different wings of the government — the agriculture, finance and petroleum ministries, as well as the RBI — look collectively for out-of-the box solutions, and move beyond interest rate increases as a form of inflation control.