Q: What will it be from the Reserve Bank by the end of this month? Do you think CRR, repo or nothing?

A: This is a very difficult situation. It’s a direct dilemma between growth moderation and inflation fighting. Governor Reddy, I believe, has said that inflation affects everybody instantaneously, especially the poor. Whereas the benefits of growth trickle down to the poor over a period of time. In fact in the absence of social security for the poor, it becomes very important to focus on inflation. They have been doing a fair bit, the tightening in the monetary policy has been going on for last two and a half years now. However, the money growth has being on an upward trend for the last two-years. So we are seeing some impact of that, but what is happening now is almost a deja vu of what happened twelve months ago.

But having said that, I think rate hike opposes some challenges. There are three reasons - firstly, it will further widen the disparity between Indian rates and the US rates. Secondly, it’s not clear how it’s going to address supply-side inflation, especially on the food grains and bottlenecks. Thirdly, it will impact industry; consumer durables will have to take a big hit.

So maintaining the statuesque on rates, especially policy rates and maybe doing something to the incremental CRR might be the way to go. That is to increase incremental CRR, perhaps widen the repo corridor, but keep the policy rates unchanged, I think that’s the way to go. Remember that the fiscal policy announced in this budget is fundamentally expansionist meaning there is the Pay Commission, other expenditure growth.

So the monetary policy has to tackle inflation and on top of it, try to accommodate the impact of an expansionary fiscal policy. So it’s a big challenge. Of course, apart from monetary policy, there can be a lot of fiscal stuff that can be done, the government has already announced duty cuts. But when we talk about growth moderation, we should also focus on the growth of railways. The railway freight has increased very significantly in the last one-year. So why can’t the railway now moderate its rate hikes on freight? Freight is a big component of costs and that goes directly to the railway, that’s Government of India.

So trying to do fiscal adjustments by reducing duties, I think it should also consider moderating the freight rates, which the railways. I believe on some items, the freight has gone up by 100%. So while we talk about inflation in food grains, we should also look at inflation in freight, which is directly in control of the government.

Q: How likely is it for the government to put out more directives on what commodity makers do with prices?

A: If you are referring to using the Essential Commodities Act (ECA), I think that will be a step backward, because there is no guarantee that it will work. people will try to by-pass or circumvent those measures. So I don’t think micro-tuning strategies is going to wok. All said and done, inflation is a monetary phenomenon in the long run and in the short run, you have fiscal measures to take care of short-term impact. It’s not as if the tough talk or the rhetoric doesn’t help.

In the last week’s numbers 6.68% close to 7% - primarily the reported numbers were just two items - edible oils and steel. So we know where the inflation is coming from. 

Q: Just one word as well on attacking this from the currency side, because some analysts have made the point that the currency needs to be loosened up, but after many months people are talking about a rebound in a dollar. Do you think that’s one option that the RBI might exercise or look at?

A: No I think I was going to mention the so-called three-pronged attack; one is fiscal policy, second is monetary policy on money supply and third, looking at exchange rate policy. I don’t think there is a sufficient pass-through impact of currency on domestic inflation. All said and done, the three biggest items of imports in India are number one - crude oil, number two - gold and number three - capital goods. None of the three directly impact inflation.

Petrol and diesel prices are actually already administered at the retail level. Gold prices don’t impact inflation and capital goods doesn’t directly come into Wholesale Price Index (WPI).

So using exchange rates to control inflation, I don’t think is a good idea in the context of India. Indeed exchange rates worked because in the US, everything from coffee, soaps and textiles, is imported. So there the pass-through impact should be much more.

But in US, the currency has gone down by 25%. I believe the dollar has lost tremendous value and you don’t see big impact on inflation; inflation is still around 2% or 3%. So the connection between currency and inflation rates depends on country-to-country and I don’t think in the case of India, the pass-through is perfect. There is much more 'bang for the buck' in doing fiscal measures and doing monetary measures.