Gloomy picture

Inflation targeting could tie the Kill’s hands

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Reserve Bank of India governor Raghuram Rajan lowered the repo rate by 25 basis points to 7,25 per cent last fortnight, the third such reduction since January, taking the cumulative drop to 75 basis points.

Few banks have lowered Interest rates for consumers In tandem, how­ever, with expectations of a poor monsoon ahead. Having accepted following an inflation-targeting approach, any upward trend in con­sumer or commodity prices will tie down the RBi from continuing with rate cuts that foster growth.

In its monetary policy meet, the RBI has painted a subdued picture. It pointed at the Central Statistics Office findings, which has revised downwards estimates of India’s gross value-added (GVA) at basic prices for 2014-15 by 30 basis points from the advance estimates.

Agricultural activity has been adversely affected by unseasonal rains and hailstorms in north India during March 2015, impinging on an estimated 94 lakh hectares of area sown under the rabi crop. The third advance estimates of the Ministry of Agriculture indicate a contraction in food grain production by more than 5 per cent in relation to the preceding year’s level.

Successive estimates have been pointing to a worsening situation,with the damage to crops like pulses and oilseeds where buffer food stocks are not available in the central pool posing a risk to food inflation.

For the kharif season, the first estimates of the India Meteorologi­cal Department (IMD) have predicted the southwest monsoons will be 7 per cent below normal. The Austral­ian Bureau of Meteorology has con­firmed El Nino. It has caused the RBI to revise its inflation projection to 6 per cent from 5.8 per cent, by March 2016. “The sustained weak­ness of consumption spending, espe­cially in rural areas as indicated in the slowdown in sales of two-wheel- ers and tractors, continues to operate as a drag. Corporate sales have con­tracted. The disappointing earnings performance could have been worse if not for the decline in input costs. Capacity utilisation has been fall­ing in several industries, indicative of the slack in the economy. While an upturn in capital goods produc­tion seems underway, a revival will need unclogging of stalled invest­ment projects, stabilising of pri­vate new investment intentions and improving sales of commercial vehicles,” says the RBI.

For the doomsayers, this rate cutting cycle is already over. More so since the RBI had clearly men­tioned that its rate actions have been
frontloaded, and the year-end infla­tion forecast has been marked up from 5.8 per cent to 6 per cent. It diminishes possibilities of further rate cuts as the base effect ends In August. Any window of opportunity could narrow if the US Fed reverses its quantitative easing policies In September 2015, which could lead to rupee depreciation.

Not all bad

There are other bankers who feel the situation is not all that bad. “With domestic real interest rates having risen over the last one year and being amongst the highest in compari­son to global peers, I think there is scope to cut the nominal policy rate even further,” says Rana Kapoor, managing direc­tor, Yes Bank. “For a more effec­tive transmission mechanism, liquidity benefit could have been provided through a relaxation in daily CRR maintenance without necessarily reducing the CRR.”

“The government should now push for more public Infrastructure spends that would support growth in the near term and create more jobs,” adds Arundhati Bhattacharya, chairman, State Bank of India.

The RBI’s next monetary policy decision is in August, by when mon­soon performance would be clearer. Proactive food management policies by the government and benign glo­bal commodity prices can mitigate some of the risks of a poor monsoon. “We continue to expect the RBI to cut rates by further 25 basis points,” says a Citi report.

“Fed action would also be keenly watched. Any pushout of the pull­back of liquidity by the Federal Reserve and good monsoons may open space for one more cut,” says Harihar Krlshnamoorthy, treasurer, FirstRand Bank. But banking deposit growth, which is almost at a two decade low, may also limit space for rate cuts. Also, if inflation Inches up, then with inflation-targeting, the RBI’s hands would be tied. Any fur­ther action would thus be completely event and data dependent.

» RYAN MAXIM RODRtOttfcS [email protected]!tidlagH,up.eoffl


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