In fact, a mini-rate war started among commercial banks leading to a public spat between the country's largest bank, the government-controlled State Bank of India (SBI), and the biggest private sector bank, ICICI Bank, over deposit rates. Lower lending rate means higher demand for money. In good times, it benefits both the business and banks to expand their respective operations and to make money. At the time of a high rate of inflation, a further expansion of money supply can only fuel further price spurt.

The RBI's monetary policy during 2008-9 was able to bring some visible cooling effect on the overheated economy due to big price surge accompanied by large government borrowing to support the social sector before the elections. Predictably, the economic growth rate slowed down a bit as the wholesale price index (WPI), seen as a barometer of inflation, took a negative turn, only for a few weeks though. Food prices, however, stayed firm, partly because of a certain policy goof-ups on the part of the agriculture ministry and partly due to a general output shortage of farm products. In short, the RBI's tight-money policy worked. One wanders what is preventing, or, to put it more directly, who is preventing the same RBI now from reverting to the tight-money policy to tackle the current inflation, which is much worse than the 2008-9 inflation? Why did the RBI suddenly take a U-turn to the cheap-money path? What had changed?

The answers are not difficult to find. The United Progressive Alliance's return to power after the Lok Sabha elections led to the increasing pressure from big business, builders, core sector investors, bankers and stock market, the traditional supporters of the Congress party and the UPA coalition leader, for reduction of lending rates to help push industrial growth indices. Another LoK Sabha poll may be almost four years away. The perception of the big business is that improving economic growth rate should get priority over inflation management, which basically hurts the lower middle-class, the pensioners, unorganized sector workers and the poor. The rich and the other middle class - the upper-middle and the middle-middle - are not complaining about the price rise. It is the large surplus income with this more privileged category of people which is mainly responsible for the present inflation.

Paradoxically, this category of well-to-do Indians, the number of who are nearly as large as the total population of the United States or Russia, with insatiable demand for goods and services, is also driving the economy even through the inflation. Only the low income group is crying hoarse about the price rise. The return to the easy money route helped the overall industrial production rate show a good growth since October, 2009.

The housing and real estate sectors are earning better value appreciation for investors and speculators. The demands for consumer durables and life-style products are moving up. Higher prices of steel, non-ferrous metals, coal, cement, power and bullions have not affected their demands, which are moving upward. Passenger car sales, despite recent price hike by all the manufacturers, have never been so good. Inflation did not compress their demand. Foreign bulls (FIIs) are back in the stock market. A sentiment of boom has replaced the 2008-09 market gloom. The big business, along with banks, is once again in control. The huge rich-poor divide in India makes the general theory of inflation that high prices curtail demand and adversely affect production and supplies is not quite applicable. Some 250 million wannabes with reasonably good income and a big wish list to acquire a lot of good things in life, partly for cash and partly with EMI facility from banks, make all the difference.

Thus, India's big business and banks, which have vast ready market for their products and services, bring to bear a big influence upon the RBI's monetary policy. Although there is a combined Opposition pressure on the government to act strongly to contain inflation, the RBI board, which is scheduled to meet on April 20 to consider the slack-season credit policy, is unlikely to take any severe measure to check monetary expansion. At best, there could be some upward movement of both the lending and deposit rates of banks, which would have taken place even otherwise because of the government's heavy market borrowing plans - in excess of Rs. 3,00,000 crore - within this period.

However, this is unlikely to have any impact on the inflation rate, except probably pushing it up further, as the substantial portion of the government borrowing will be pumped back into the social sector of the economy leading to the possibility of a further increase in the money supply with the public. Also, the external factor will come to play in this regard as much will depend upon the vagaries of nature, especially during May-August, to which Indian economy has been traditionally susceptible. The present nation-wide heat wave and the possibility of another drought, the second year in succession, may make the inflation situation, particularly for food articles, even more severe during the current year. It is to be seen how the government, RBI, big business and banks get together to apply their mind to contain inflation without affecting the growth rate.(IPA Service)