One may argue that the supply side management, which falls more under the domain of the government, is mainly responsible for the continued scarcity of food and other articles of necessities and their high prices. Frequent oil price hikes since its deregulation by the UPA government have contributed to general price rise of all commodities. This may be true, only in some part, since there is no supply dearth of these articles at higher prices. Even the demand and supply of petro-products did not contract after their 40 per cent price jump in less than 24 months.

The uncomfortable part of the fact is: higher lending rates did not compress the propensity to consume among the high spending middle class and the rich, who account for 20 per cent of the population and almost 75 per cent of overall market consumption. Similarly, higher savings rates did not induce this fund-flush creamy layer of the society to invest in term deposits with banks. The rich don’t save with banks. Despite the hardship it is the middle class and senior citizens who took the advantage of high savings rate and put their last penny in bank term deposits. The country’s central bank has obviously gone wrong with regard to the estimates of monetary expansion (M3). It seems – and, RBI may know it very well – that the massive monetary expansion which has taken place in the last few years is mostly in the form of unaccounted money. The central bank, on its own, can do little to control the supply and expansion of black money which is spurring inflation.

No central bank measure can control the expansion of illegal money supply in a country. The government can. The lid of the country’s unaccounted money monster, if blown off, may swallow the who’s who of Indian politics and, with them, the government itself. The political risk factor attached to such an action is too high, beyond any one’s guess. The huge accumulation of black economy in India is a meticulous product of carpentry by corrupt politicians and bureaucracy, crafted and nourished over the last six decades with uncanny perfection. Neither politicians, nor bureaucrats – past and present – are keen to demolish the edifice of officially unaccounted wealth.

On the other hand, RBI’s inflation control policy has proved to be most unkind to those ordinary citizens without black money and who rarely benefited from surplus money supply in the system. This group, representing nearly 60 per cent of the population, has neither been an indulgent spender, nor a compulsive saver. While inflation badly hurts this group with nearly inelastic income, industry and businesses are hit by high cost of white money, prolonged depression in the stock market, unbridled imports, growing anti-corruption outcry from the civil society backed by judicial intervention and mostly politically-motivated selective tax-raids.

The last inflation expectation survey by RBI revealed that only 25 per cent of the respondents felt that the RBI monetary policy helped control inflation. The slow-down in industrial production has more to do with the highly bearish stock market, leading to a big delay in industry’s fund raising programmes through the equity route, than the high bank lending rates prompted by the successive RBI rate hikes. Industry no longer depends on large bank loans to set up big projects. It raises funds from the equity market through share issue at high premium. Bank fund is used mostly as working capital. The bearish equity market – and not the RBI’s credit policy - has dampened industrial expansion and production.

The latest hikes of the repo rate and the reverse repo rate – 12th such measure over the last 18 months - to fight the continuously spiraling inflation are unlikely to achieve much. The inflation rate (WPI) in August was 9.78 per cent, almost double the RBI’s comfort level of 5.0 per cent. Neither the government, nor RBI is willing to accept the reality that the current character of inflation in India is credit policy neutral. It is the velocity of black money circulation which is triggering inflation. Lending rate hikes are rather choking the economic growth at a time when the stock market, influenced largely by global indices, is witnessing the longest ever uncertainty and depression.

Interestingly, RBI’s survey, last month shows that the inflation expectations of households for the next three-month ahead have tended to be slightly lower at 11.8 per cent from 11.9 per cent assessed during the last round of survey. However, for next one-year ahead they have moved higher at 12.9 per cent from 12.7 per cent. Households expect inflation to rise further by 60 and 170 basis points during next quarter and next year respectively from the perceived current rate of 11.2 per cent. Unlike in the previous round of the Survey, the percentage of respondents expecting price rise have gone up for all product groups (viz., food, non food, households durables, housing and services).

In view of these RBI findings, will it be wrong to conclude that the Indian central bank’s monetary control mechanism has achieved little to control inflation? If the universally time-tested monetary control mechanism has failed to be effective in India, it is simply because of the gigantic size of India’s black economy and RBI’s inability to influence this ever expanding unaccounted wealth with a highly influential section of the society. Few will disagree that government policies over the years are responsible for creation and protection of the monstrous parallel black economy.

It may be time that RBI wakes up to the reality and its policy limitations in inflation control. It is already under pressure of the government, business and industry to roll back the so-far-unsuccessful monetary expansion control tricks. There is no guarantee that the latest dose hike in bank rate will help douse the inflation. There never was. The peak economic season starts from October 1. The government as well as the RBI has no justification to dampen the mood of economy by retaining high lending rates, especially after they failed to deliver the desired results.

The new Kharif (autumn crop) arrivals will hopefully bring some soothing results in the price front. Even if it doesn’t, cheaper and easy money from the banking system will certainly bring cheers to business and industrial producers and also the stock market. Petro-products prices continue to be a pain for the common man. The number crunchers will breathe easy. The economic juggernaut will roll on even if the weak and tired onlookers—the common man – with growing holes in their pockets are somewhat left further behind in the process. At least, there will be some year-end talking points on the part of the government, RBI and the Planning Commission about India’s impressive GDP growth despite difficult times. Needlessly, RBI is spoiling the party. (IPA Service)