Cut rate policy making

    After nearly three years, RBI reduced lending rates by an unexpected 50 basis points. This seems to have been a reaction to prospects of sluggish growth at home and a slowdown in many of the OECD countries. The RBI is still wary of the inflationary pressures.

“It must be emphasised that the deviation of growth from its trend is modest. At the same time, upside risks to inflation persist. These considerations inherently limit the space for further reduction in policy rates,” Subbarao said, adding that going forward, the policy stance would change based on the growth-inflation dynamics.

The RBI also said, “The economy is likely to revert close to its post-crisis trend in FY13, which does not leave much room for monetary policy easing without aggravating inflation risks.”

    Unfortunately, the executive branch of government has been too paralyzed to respond with robust policy measures to support growth. Without higher spending on infrastructure, reforms to food retailing the combination of faster growth and moderate inflation rates are unlikely to be achieved together in the near term.

    Relying solely on the central bank to fulfill the dual targets of high growth and low inflation would render  monetary policy inflexible and sub-optimal.