HOW CAN RBI REDUCE PRICE OF POTATO, MILK AND RICE?
By Ruma Dubey
Tomorrow is RBI Credit Policy and all eyes and ears are tuned to only one person – Raghuram Rajan. With nothing major to expect, most of the times, markets and TV channels have started pinning everything on this one event. Earlier it was an event, which got covered in newspapers the next day but in today’s proactive world, this meet has become a show stopper.
Why have we started giving this meet so much importance now? Look at it like this – the root cause of all evil today are the food prices. It is food inflation, which constitutes 40% of the average consumption expenditure but one cannot help but wonder how repo rates will help bring down the cost of the food that we eat and drink? For people like me and you, price of steel or iron, plastic or cement do not mean as much as the price of milk, onions, potato, rice, apples. So why do we expect the RBI Governor to bring down the price of these day-to-day consumption items? The rate hikes/cuts by RBI helps bring down or raise industrial or core inflation but a repo rate cut or hike will have no bearing, directly, on food inflation. A rate cut or a hike, for us is essentially more psychological – a hike at this stage, when demand as such is hurting and IIP is bleeding, would psychologically hit us in terms of growth getting hit further. And that in turn affects our demand. Today, demand is down and though raw material prices have risen, companies are unable to pass on the increased cost to the consumers. This is affecting their earnings and a further rate hike at this juncture, will only aggravate the situation.
If food inflation is at the crux of all the woes of the economy, surely, it is quite apparent that it is not RBI but the Govt which needs to work. Take the case of onions. The price has shot through the roof to Rs.100/110 per kilo and following a major public hue and cry, the prices, within a week have come down to Rs.40/kg and post Diwali, can also go down to Rs.20/kg. Did RBI intervene here and get the prices of onions down? The Govt knew that it was a supply constraint, with middlemen hoarding onions and artificially jacking up the prices. It acted on that, got the supply going and prices have automatically come down. The Govt only had to say that it will import cheaper onions from China and suddenly supply was made available. Now isn’t the same logic true for most of the fruits and vegetables that we see at exorbitant prices in the sabji mandi? Why there is will from the Govt to come down on middlemen?
It is a known fact that it is the middlemen who are causing food inflation. This is due to pathetic supply chains. In fact the Govt has never really got down to organizing and sorting out the supply constraints, it has just grown rampantly and at random, each making rules as per their whims. They know that middlemen are making maximum in the bargain but because these middle men are connected politically, many even working as a front for those in power, how can these parasites of the society ever get eliminated? It is ironic isn’t it – we have had a good monsoon and food prices are still high. Blame it on the prolonged monsoon or when rains are scanty, on poor monsoon – either way it is the monsoon to blame. Back to the question then – how can RBI by hiking repo rates get monsoon to behave and control food prices?
It would thus be best for RBI to maintain a status quo and not make matters worse for an already injured economy. A 25 bps repo rate hike would be pure tokenism and might make no difference. But if it gets higher than that, combined with a cut in MSF or the rate of Marginal Standing Facility (MSF) then maybe it could help unwind the liquid tightening measures.
Thus the focus of RBI would be more on undoing the initially adopted liquidity tightening measures to arrest the precipitous fall of the rupee vis-à-vis the dollar. And the Govt needs to work on controlling food inflation; RBI simply cannot do anything there!