Where do you take the Monetary Policy from here?

When the going gets tough, we need to get tougher. After failing 13 times to evaluate the reason for the acceleration of inflation, the RBI seems to be persisting with the theory of higher interest rate. The poor should have money to live and eat, when the market gets costlier and costlier. Market prices, it appears are determined in North Block in Delhi and RBI, Mumbai. Petrol prices hikes have been jacked up, knowing fully well that there will be spirilling inflation. Import is becoming costlier, and subsequently imported prices too, due to faulty policy of the exchange rate mechanism(by RBI) from 2002. If we continue like this, we will hit the ceiling. The Government has failed to achieve the promised Growth rate, it has failed to keep the fiscal deficit at 4.2%, inflation continues to rise, Rupee continues to plummet. Our Government seems to be in total darkness over Monetary Policy which seems to be driving the economy of the country to the brink, with inflation exceeding 9% for the last straight 11 months, food inflation crossing to 11%, North block seems to be unaware of the economic earthquake which is in high percentile on the Richter scale. Appreciating Dollar is probably adding and continues to add to the national woes. RBI is watching the situation with calm alarm! Oil Companies gleefully add Rs 2/- to the oil price but when things change in the international market like the recent decrease in price of oil per barrel, they cold shuddered Government’s admonition to reduce the oil price by Rs 2.05 paise, instead reduced it reluctantly Rs 1.85 per litre (petrol). With oil companies holding monopoly, they have been conferred right to increase the oil price as they choose by the Government which wants to shed responsibility and blame and wash off their hands of the price hike. Fiscal deficit has hovered beyond the Finance Minister’s 4.2%. How much it would over-shoot has to be seen. Banks has been raising interest rates, thirteen times in the last eighteen months, while the base rate concept remains off bank’s implementation calendar, yet the resultant inflation rate has been growing to touch the double figures. Inflation swells, interest rates are going up, money has to become dear but becoming dearer up-setting the monetary theory propounded by RBI. How and why? Credit squeeze has resulted in slowing down of the output of Goods and services while not necessarily driving demand upward. Increased cost of deficit has an impact on the industry in two ways- one, industries who were expected to go in for expansion have shelved the proposal, no new proposals for release of primary market shares, FIIs selling their stakes and repatriating, which has put the pressure on the Rupee. Our Country which imports 70% of petroleum products and 150 lakh tones of edible oil is increasing its Balance of Payment position by increasing the cost of import. While the Planning Commission, Finance Ministry, Prime Ministers’ Advisory Council rant that things will make correction by March 2012, slippery slopes of a vicious stagflation cycle is visible; it would be very difficult to break it. The avalanche of price rise is cutting the common man. In a developing economy like ours, money supply grows faster than the economic growth, but in reality RBI’s breaks slows growth of money supply. Reserve Bank should realize money supply is not the villain, but the artificial inflow of black money which has been flowing to our system is causing upward inflation. Even a Bank demand draft became exchangeable currency. Monetary policy and monetary tightening need innovation and clever anticipation. Tightening of money supply alone cannot help lowering inflation. The Rupee devaluation against Dollar’s appreciation was visible in 2002. But RBI’s inability to stem the riot in the bud has cost the nation heavily.