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PLAYING SAFE

For the governor of the Reserve Bank of India, Duvvuri Subbarao, the name of the game is consistency, and he stuck to his guns in the second quarter review of monetary policy for 2012-13 by not cutting policy interest rates as many had hoped. Inflation is still too high and too sticky to warrant a cut. The RBIís policy stance has been consistent since January this year: maintain an interest rate environment that contains inflation and anchor expectations, maintain a modest liquidity deficit for the banking system, and respond to downside risks to growth. But this last has not been on top of the agenda, prompting the finance minister, P. Chidambaram, to say that the Central government would tackle the challenge of reviving economic growth alone. On October 29 ó the day before the monetary policy review ó the RBIís macroeconomic and monetary developments review lowered GDP growth estimates for FY13 once again: to 5.8 per cent from 6.5 per cent; so the finance ministerís reaction is understandable. But most economists believe that the RBI is doing the right thing, because inflation is likely to get worse from October to December; the RBI has raised its estimate of inflation at end-March 2013 to 7.5 per cent from 7 per cent. And, to a great degree, mass opinion is also likely to side with the central bank on the importance of price stability; inflation is a corrosive feature of peopleís everyday lives.

While it did not cut interest rates, the RBI reduced the cash reserve ratio that banks have to maintain by half a percentage point to 4.25 per cent of their total deposits; demand for cash is high in the festive season; this is the fourth cut in CRR since January, suggesting that CRR is once again being used as a monetary policy tool, and not just for liquidity management. The central bankís position is reminiscent of that of the European Central Bank President Jean-Claude Trichet in 2009, who said, ďwe have only one needle in our compassĒ, about the ECBís strict posture on price stability. And for now, that may be the right side of the trade-off between inflation and growth. But all trade-offs involve sacrifice; hopefully, India will not be sacrificing growth at the altar of a far-too-strict inflation control policy.