Lower-than-projected inflation may give RBI room for another rate cut: Dharmakirti Joshi, chief economist, CRISIL Ltd

If the inflation targets are met, you will not see any interest rate hike. If inflation turns out to be lower than what it is projected right now, that might open up a chance for rate cut. However, if inflation goes up faster than expected, we could even see a rate hike. But this is a very low probability event. Going ahead, the monetary policy will be data-driven and react to the direction in which the data move”

Written by Sandeep Singh | Published:August 4, 2017 2:12 am
Dharmakirti Joshi 

On Wednesday, the Reserve Bank of India (RBI) announced a 25-basis point (bps) cut in repo rate. While the markets were hoping for a higher rate cut on the back of low inflation, Dharmakirti Joshi, chief economist, CRISIL Ltd, told The Indian Express that the 25-bps cut will be mildly supportive of growth, and even a 50-bps cut would not have been good enough for reviving the economy in a material way as there are several factors that play a role. He said that while no one is expecting a big rise in inflation, a lower-than-expected inflation numbers going forward might trigger another rate cut.

Given the current levels of inflation, do you think that the RBI could have gone for a more aggressive rate reduction rather than a 25-bps cut in repo rates? Central banks generally try to move gradually and not go for big cuts unless it is absolutely warranted. It should also be remembered that we are in an inflation targeting regime which means that the central banks are more cautious on inflation. From the RBI’s communication on Wednesday, it seems that they are targeting a 4 per cent inflation over the medium term.

For that, the monetary policy would have to be extra cautious. The other aspect is that one should not get too much carried away by really low inflation levels right now, as it is expected to move up from current levels (though not too much). Even Crisil expects that inflation will be around 4 per cent and will be within the target range of the

RBI for the following reasons: (i) normal monsoon, which will keep food inflation in control; (ii) benign global oil and commodity prices, which along with a strong rupee, will keep imported inflation in check; and, (iii) only a moderate pick-up in domestic demand, which will keep the pressure on core inflation muted.

Is this rate cut good enough for the economy?

I think even a 50-bps cut would not be good enough for reviving the economy in a material way. But what is good is that it is mildly supportive of growth. While it is not going to turn the investment cycle around, it will reduce the cost of debt a little bit and that will help banks. There are many other factors required for full-fledged revival.

Do you think that if inflation targets are met this year, there is a scope for further rate cuts? 

I think that if the inflation targets are met, you will not see any interest rate hike. If inflation turns out to be lower than what it is projected right now, that might open up a chance for rate cut. However, if inflation goes up faster than expected, we could even see a rate hike. But this is a very low probability event. Going ahead, the monetary policy will be data-driven and react to the direction in which the data move.

The RBI policy statement reads that industrial performance has weakened in April-May, capital expenditure (capex) cycle remains weak, and there is not much traction in implementation of stalled projects.

Do you see a revival on all these fronts, and when? 

Investments as a percentage of GDP (gross domestic product) has been falling for six years continuously and the best that can happen is that it does not fall further. Now, I think the investment-to-GDP ratio has bottomed out and should not fall more and this is the best-case scenario for this year. We believe that reviving private investment is a tough task at this juncture because there is an overcapacity, especially in the manufacturing sector, and also there is too much debt in the balance sheets of companies in the infrastructure sector. So, private investment dynamics have not changed over the past 2-3 years. What this means is that you need to create fresh consumption demand so that capacities get utilised.

While the government is trying to revive investments, it lacks the muscle to kick-start investment in the economy. Also, the manufacturing sector in India, which has overcapacity, is mostly private enterprise and almost 90 per cent of the GDP and more than 90 per cent of investments are done by private sector. They will only invest if they see future earning prospect.

What can the government do beyond investment in roads and railways? 

Low-cost housing is a good opportunity. If the government manages to push low-cost housing then it can lead to creation of employment (as real estate is labour-intensive), and it will also help steel, cement and other sectors that have linkages with real estate.

In its statement, the RBI said that while food and beverage inflation moderated further in June, there are visible signs of “usual seasonal price spike”. How big is this concern and do you see a spike in inflation going forward? 

I would not read too much into vegetable inflation. There is a lot of noise around it whenever prices rise but this noise is something that central banks can ignore. Part of the reason is that it is seasonal and also this is a year of good monsoon and the likelihood of these sustaining is very little. To me, the worry would be a sharp increase in crude oil and commodity prices and aggressive implementation of the (Seventh) Pay Commission recommendations by states. Inflation might also go up because it is low as of now and may rise to its equilibrium level but I don’t see inflation spiking out of control.

The good news is that the risk that the RBI was visualising a couple of months ago has not materialised. So, no one is expecting a big rise in inflation.

Do you see any hope for credit growth revival soon? 

We need to see the overall credit in the system. While I agree that the banks are a major player, but corporates are also raising money from the bond market. Bank credit remains weak, but the bond markets have grown over 40 per cent in 2016-17 over the last year and even NBFC (non-banking financial company) credit is also strong. So, at an aggregate level, the picture is not as bleak as when you look at the bank credit alone. The bank credit will rise slowly and the demand for credit will be largely retail till the investment cycle picks up.

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