Yes, inflation is down and output weak. But will RBI snip those rates?
_71393_730x419-m.jpg "Yes, inflation is down and output weak. But will RBI snip those rates?")
Every time there is a decline in inflation or industrial output, the standard demand of 'dial-a-quote' economists and experts is “there is a need for a rate cut by the Reserve Bank”.
But despite dozens of such demands, the Reserve Bank of India has listened to very few of them since January 2015. The last cut in repo rate was announced in October 2016, when the RBI reduced it by 25 basis points to 6.25%.
In this scenario, either the experts and economists are completely out of sync with how the RBI reads the economic indicators like IIP index or Inflation, or they believe themselves to be nothing more than lobbyists for the Indian industry, which requires the same ranting all the time, i.e “reduce interest rates, reduce interest rates, please reduce interest rates to boost growth”.
The decline of 6.3 percentage points in the IIP to 1.7% for May 2017 as against 8% in the same period last year has once again prompted these revered economists to call for a rate cut.
The fact that India's retail inflation cooled down to 1.54% in June from 2.18% in May, is another reason for the rate cut.
Will there be a rate cut in the next policy?
To take a decision on a rate cut, the RBI follows the retail inflation target of 4%, with a band of 2% on either side. But at the same time, the Monetary Policy Committee also keeps in mind the future outlook for inflation and money supply in the financial system. Another point that dominates such a decision is the monetary policy in the US, which can have direct impact on Indian financial markets.
The RBI’s monetary policy document for December 2016 - just after demonetisation - said the decision to not ease the repo rate was taken due to imminent tightening of monetary policy in the US, which was triggering bouts of high volatility in financial markets.
On the inflation front, the RBI factored in opposite price movements between vegetables and other items in the basket of retail prices.
The decline in vegetable prices was a result of demonetisation definitely, whereas the possibility of price rise in other commodities held real risk for inflation management.
Coming to the IIP in May IIP and June's retail inflation, a similar argument pans out. The decline in retail inflation was a direct result of discounts offered by retailers to clear their pre-Goods and Services Tax stock. For the same reason, manufacturing companies across India curtailed production, leading to a fall in IIP numbers.
India's former chief statistician Pronab Sen holds the same view. "It is a possibility that the companies held back on manufacturing new units to clear their old stocks before the implementation of the GST. And if this is true, then the IIP will see a huge spurt in the months of July and August," he says.
The next bimonthly monetary policy by the central bank will take note of the future prospects of retail inflation - in the wake of good monsoons - and the aggregate demand in the Indian economy.
But no matter how many times the industry and 'dial-a-quote' experts demand a rate cut, it will come only when the RBI weighs all the economic indicators and finds the time is ripe for pumping more money in the economy.
First published: 13 July 2017, 21:49 IST
