What made Subbarao take the plunge?: RBI rate hike
July, 27th 2011
Close to the end of his term and, perhaps at the beginning of a new innings,Duvvuri Subbarao has picked up a sledge hammer to attack inflation. His move is decisive, tone is hawkish and language is unsparing when he blames New Delhi for doing little to bring down food prices. He comes across as a man in a hurry, who is unimpressed by Corporate India's familiar clamour: "give growth a chance". Growth, he feels, will take care on its own. What needs to be fixed is spiralling prices; more importantly, the wage-price spiral.
It's a fear that has troubled central bankers down generations, across the globe. When higherinflation is matched by higher salaries, small doses of rate increases fail to pull down demand, particularly among the urban consumers.
As people learn to live with high prices, almost unknowingly they prepare themselves for a higher inflation in future. And then one day, inflation spins out of control.
For a central bank governor though, few things in life can be scarier. No central bank chief wants to be remembered for not having done enough on the price front when realtors hold on to ridiculous property prices, commodity speculators laugh their way to banks, and easy money is sloshing around international financial markets.
Chances are Subbarao has New Delhi on his side. During times when food prices have eroded the purchasing power in villages and land-grabbing has sowed the seeds of discontent, it's only logical that the powers that be will pick inflation over growth. Perhaps, the presence of a hardcore monetarist like Chakravarthy Rangarajan in the government made Subbarao's job a little easier.
But it's time India Inc and Dalal Street made a mental note of a simple truth: RBI's far more worried about inflation than they think. If companies can no longer pass on the higher cost to consumers, they should be ready to take a hit and reconcile with lower margins and stock prices. It's a price that all have to pay. And, as always, home buyers, small investors and the salaried will bear the brunt of a malaise they are clueless about.