‘Helpless’ RBI shadowboxes inflation and points finger at a wastrel Centre

The central bank has practically said there is little it can do to contain inflation if the government continues with its profligate ways.

The Centre’s expenditure policy tilts towards spending on social schemes, subsidies and higher wages for its employees. This is leading to an increase in aggregate demand without a commensurate increase in the supply of goods and services, which fuels price rise everywhere.

If the government, instead, focused on creating capacities to reduce supply-side pressures, inflation expectations can come down sharply and there would be far less need for demand-side management.

The government has also done nothing to raise revenues such as widening the tax base; it can’t depend on one-off revenues — such as the over Rs1,00,000 crore from 3G spectrum auctions received in this fiscal — to fund expenditure.

To boot, the annual borrowings of the government is sending askew RBI’s quest for price stability.

If the market cannot absorb the high bond supplies from the government, the RBI is forced to fund the fiscal deficit through open market operations (OMOs).

Mint Road is right in shifting focus to the Union Budget for the next fiscal, which will be presented to the Parliament next month-end.   

If all of the RBI’s resources are going towards supporting a huge government borrowing programme, then price stability objectives will take a back seat.

The bank is also sending out a signal that its independence is being hampered by a fiscally imprudent government.

For the money markets, the focus shifts now to the Union Budget. Players will look to see where spending is going to happen and where the revenues going to come from.

A higher-than-expected borrowing programme will send bond yields sharply upwards.

As expected, the bond market shrugged off the policy rate hike and continued in its lacklustre ways with yields hardly showing any volatility.