I was too focused on arguing that India and China should not be lumped together as I see happen so often in the financial and economic literature, but you have not made that mistake.

I also should have said in my last comment that I really appreciate all the contributors on this forum. The contributions are of a very high quality, insightful and very often sparks my interest.

This article did not compare the monetary policies of China and India. It was focused on India.

Further, I disagree with the view that India cannot grow faster with current investment rates. Kelkar and others pointed this out much earlier. My main concern was with the divide between WPI and CPI inflation and the fact that CPI inflation, in particular food price inflation, is being fueled at the current time by higher procurement prices filtering to wholesale and retail prices which then lead to food imports (at prices higher than those paid to the Indian farmer) which then lead to higher procurement prices. So, the cycle resumes.

This is the main point of the article which then goes on to say that tighter monetary policy will only tangentially affect the CPI dynamic although it might hurt growth and lower WPI inflation, such as it is.

Thanks again for writing.

The main difference behind the differing investment stories is monetary policy and market systems. In China lending and deposit rates are almost meaningless. Banks extended loans at an unprecedented rate in 2009 because they were trying to please the government, while SOE’s (and also private sector entities given incentives) were only too keen to invest. In fact, the PBOC has maintained a higher policy rate than the RBI (lending rate of 5.1% vs Repo rate of 4.75%). Yet that being said, the monetary stimulus in China has been arguably greater than in any other developing economy (as alluded to before, policy rates are pretty meaningless in China, at least based on my understanding).

Compare this to India, where persistently high costs of funding and slumping confidence led to a pullback in lending. Banks were reluctant to ramp up lending despite a falling policy rate, even to the extent that they continually tried to refuse RBI and government requests to lower their rates and ramp up credit.

While I agree with you that there is no need for the RBI to aggressively tighten monetary policy and India’s inflation problem is overstated, even if the RBI were to leave rates low it would not spark an investment boom ala China. In this instance I do not think the two nation’s growth story’s and monetary policy responses can be compared.