Tweaking repo rate can’t control prices
In increasing the repo rate, the Reserve Bank has attempted the standard protocol for controlling the inflationary pressures on the economy. As a result, the interest rates at which banks lend money will increase. There will also be an upward revision in the interest rates charged by banks on existing loans. Even state and Central governments will have to pay higher interest on loans they take. Banks will have to deposit an increased share with the Reserve Bank of all the deposits received. These are the standard banking prescriptions for controlling price rise and inflation. The point to ponder is whether it is sufficient.
There is concrete evidence that prices have been on the upswing. The consumer price index crossed the 7 per cent mark last March. The international price of oil remains at over $105 per barrel. The domestic price of petroleum products, including LPG and CNG, has also been increasing. Already, many states have increased the bus, taxi, and auto fares. The heavy increase in the price of cooking gas used for commercial purposes has forced hotels and restaurants to increase the prices of food items. India is the world’s largest importer of cooking oils like palm oil and the price of these oils has almost doubled in less than one year. For the poor and the lower middle class, the price rise is unbearable.
The question that needs to be answered is whether the tweaking of the repo rate by 0.40 per cent is sufficient to control the price rise. Banks will have to deposit Rs. 4.5, instead of Rs. 4, per Rs. 100 with the Reserve Bank. This increase will take away nearly Rs. 90,000 crore from the money market. It was just a month ago that the RBI had adjusted its monetary policy to take into account the inflationary symptoms. That it was compelled to review the situation within a month shows that its control mechanism is not as effective as perceived. Thus to expect the repo rate increase to bring down prices is to be over-optimistic. The government cannot leave the whole issue to the RBI mandarins. It needs to take bold decisions like reducing the tax on oil to not only pass on the benefits to the consumers but also to stop prices from rising. What is needed is a package of measures to control inflation.