As if hike in its policy rates 10 times in less than one year was not enough, the Reserve Bank has hiked its policy rates again recently, this time by a sharp 50 basis points leading repurchase rate to 8 percent from 7.5 percent earlier. With headline inflation remaining consistently above the 9 percent mark since December, 2010, such a move was nothing but anticipated by marketers, analysts, bankers, and the industry alike.

Ahead of the Central bank's quarterly review of annual monetary and credit policy, the Union Finance Minister Pranab Mukherjee hinted once again that the RBI would take required steps to bring down inflation. An official statement clearly said that the Government wants to bring down inflation to 6-6.5 percent "in the near term" from 9.44 percent in June. Needless to say, the June inflation figures are much above the comfort zone and it is quite convincing that policy measures are required to rein it in. So, the RBI move seems justified! But look again: the apex bank, before recent hikes, spiked its key rates a record ten times since March 2010, resulting in higher short-term lending (repo) and reverse repo or borrowing rates by a massive 275 basis points. But still, the desired result - inflation at a comfort zone - is hardly achieved.

In response to the monetary tightening, commercial banks have continued raising their rates, thereby making loans costlier for the industry. As a result, credit off-take and industrial output growth both have slowed down, with the latter falling to 5.6 percent in May, mainly due to manufacturing downfall and slump in capital goods output, so much so that the new figures have forced the Government to lower its economic growth forecast to 8.6 percent for the current fiscal from about 9 percent earlier.

For exporters, the debt crisis in the EU region, India's largest export market, is another woe, which could certainly upset the recovery in the exports that have grown in high double digits over the last few months. Also, currently the uprising in the MENA region, the greater than anticipated slowdown in the US economic activities, and the renewed downside risks in the world economy all signal darker prospects for the export sector.

So, both the external and internal factors, like dark clouds, have already started hanging over the economy, the industry, the exporters, and the small and medium-scale enterprise sector for all, and the recent move by the RBI would certainly have a bad effect in terms of growth prospects, and even some worse outcomes can be anticipated if inflation again refuses to melt down. And what if inflation rises again!

These days, domestic inflation could be catapulted by a little commotion in the global economy - a tsunami in Japan, a political turmoil in Turkey, debt woes in Europe, tumbling consumer confidence in the US, rising global crude prices, or anything else. Every time when prices rise, policy rate hikes at the stake of growth couldn't be the right solution. Policy makers must look beyond monetary tightening.

Till now, the Government has failed to push some economic and policy reforms in some critical areas. In taxation, for example, 'The Direct Taxes Code Bill, 2010' is still under scrutiny while no consensus could be achieved between the Centre and the States regarding the 'Goods and Services Tax'. Also, the proposals for retail trade liberalisation and the National Manufacturing Policy are still in the works for a long time. In addition, the Government should speed up reforms in some other key areas like banking, mutual funds, pension funds, land acquisition, and food security. Pushing policy reforms would certainly help the economy to cool inflation without snuffing out growth.

Originally Published in The Stitch Times, (Vol. 9 Issue 9) September-2011