What use rate hikes, when banks borrow at 9%+, govt at 8%?

The Reserve Bank of India is scheduled to hold its third-quarter review of the annual monetary policy for the current fiscal on Tuesday. But would it say anything new?

Inflation has been above the central bank’s estimates for a while now and the market is expecting it to raise reverse repo and repo rates, which are at 5.5% and 6.5%, respectively.

And the growth versus inflation debate continues at all fora.
By now, you must have realised that while everyone talks about inflation, no one wants anything done about it.

That’s because growth is dear to all — businessmen cannot make profits without growth, government cannot get votes without growth (even if it comes at the cost of worsening finances and high inflation) and market players cannot earn bonuses without growth.

So, the unsaid diktat seems to be that inflation, even if it kills the economy, should not hurt growth — meaning, the RBI must make sure growth does not suffer at the hands of inflation.

Now that’s beyond the scope of any policymaker and hence precedence will be given to support government borrowing, which is inflationary in nature because money borrowed is not spent on creating capacities but on fuelling temporary demand.

The RBI is expected to raise rates by 25 basis points (bps) or even 50bps as it has to show it is doing something.

The cost of overnight borrowing for banks will go up to 7% from 6.5% if a 50 bps hike is announced, but that means nothing.

Banks are borrowing in money markets at 9.5% levels, while the government’s cost of borrowing is around 8.10%. This won’t change with a hike in repo rates.

Inflation will not come down with rate hikes, nor will it affect growth in any form.
And after the policy, the usual suspects — the finance minister, the prime minister’s advisers, the finance secretary, marketmen and economists — will all have a point of view. To the T, they will all say RBI is doing the right thing by raising policy rates (or reducing — if it does!) and now inflation will drop, growth will go up and everything will be all right. There will be talk of how many more hikes are ahead too.

That’s because economists have to forecast inflation, growth and other macro-economic variables. But how often are they right? If they were on the ball, they will be managing money, not forecasting.

The soap opera continues.