How will RBI tackle inflation?

Fri, 29 Jan Pre-Open

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The life of policy makers is filled with difficult choices. The reality they have to deal with does not come in neat packages. Hence, there is seldom a perfect solution to pressing problems. Take India's current landscape.

Compared to the developed nations, India managed to survive the economic slowdown relatively well. While the world went in to the deep freeze, the Indian growth story merely took a pause. And it is now back in the limelight. But so is inflation.

There in lies the issue of difficult choices. While everyone wants the growth story to continue unabated, the rapid food price inflation is reaching unmanageable levels. In fact, it is rapidly becoming a political nightmare. Yesterday there were massive protests in Bihar over food prices. The RBI could increase interest rates to tame the price rise. But that could lead to a serious side effect. It could retard growth.

In order to avoid that choice, the central bank is likely to instead opt for raising the reserve requirements of banks today in its monetary policy review. In fact, observers widely believe that it will raise the cash reserve ratio (CRR) by 0.5%. CRR is the proportion of deposits that banks must keep in cash with the RBI.

The RBI is not the only one having to make the difficult choices. The central government is too. It would want to control the excessive liquidity in the system. But there is one very useful purpose the liquidity is serving. It has propped up the stock markets. At a time when several public sector companies are slated to come up with public issues, the last thing it needs is for the markets to lose their legs and fall.

Does India have the innovators?
The last few days have been eventful for all technology lovers. Be it the Auto Expo in Delhi or the Consumer Electronics Show (CES) in Las Vegas - there are interesting developments in several new technologies. Innovation is not only a matter of technology. It is as much a matter of economics.

Ask yourself, where do the bulk of cutting-edge information technology products come from? The US. It is one of major reasons for its economic dominance over the last several decades. Other major economies like Japan and Germany are also technology leaders in several industries. Nations like South Korea, which have recently joined the developed world, are also bold innovators.

How about us Indians? Sure, we are not in the same league as these countries. In our opinion though, we are showing positive signs. Take the entire brouhaha about Apple's ipad launch. It is supposed to take the fight to Amazon's Kindle. Both American companies. Much of the underlying display technology is either Taiwanese or South Korean. But the interesting thing is that small Indian start ups have come up with their own devices. Hyderabad based Notion Ink is working on a tablet, in the same space as Apple. Ahmedabad based Infibeam is working on an e book reader, in the same space as Amazon. It may sound trivial, but innovation is no trivial matter. The role of a Sony, Toyota or Honda in transforming Japan to the world's second largest economy cannot be overemphasized. The question is, are there such companies in India too?