Rooting For A 'Neutral Rate'

A 'neutral rate' path is the best policy option available in the RBI's tool kit to support flagging growth while fighting inflation.

Monetary policy actions of the central banks world over have come under M intense scrutiny from leading economists and policy analysts ever since the runaway rise in general price levels - retail inflation to borrow words from economists' lexicon - started roiling most economies in the world of any nomenclature - be it developed or developing, emerging or advanced. The spiralling prices have landed nations in a piquant situation with the talk about an impending recession - a fall in economic growth through two successive quarters technically - stoking fears of a 'hard landing' getting louder. In plain English, hard landing refers to a rapid fall in the rate of economic expansion after a sharp uptick arguably attributed to higher prices chipping away the disposable income in the hands of common men.

It may be also in order here to mention that higher interest rates for longer periods turns capital dearer. The effect of these twin developments means an overall contraction in aggregate demand or purchasing power of the people leading to further fall in economic activity, employment and income levels. In short, the economy will eventually enter a vicious cycle of slowing growth with each critical variable flagged above feeding into each other's weakness.

Needless to add, inflation is generally considered as an indirect tax on income and any slip in containing it will fan recessionary pressures pushing the economies to the brink. This is because higher prices would hit where it hurts most - a slowdown in private final consumption expenditure the key driver of economic growth at any given point of time.