Inflation-wary RBI doesn’t cut rates, but reiterates willingness to walk halfway if government does its bit.
Given the collapse in economic growth, particularly in the case of manufacturing, which saw a contraction in 2013-14 following a flat 2012-13, as well as a dampening of inflationary pressures, a credible case could have been made for the central bank cutting interest rates. At 8.6 per cent in April, CPI inflation is much lower than the 11.2 per cent levels in November alone and, given the high inflation levels in the June-November period last year, headline inflation is certain to trend down. The situation is even better in the case of WPI inflation where, along with the collapse in economic growth, inflation has been trending down much faster and more consistently.
Even so, there are several imponderables, not least of which is the possibility of an El Nino-induced drought. In which case, the reduction in vegetable prices which was responsible for much of the decline in CPI inflation — vegetable prices rose 46 per cent in October last year, 61 per cent in November and 38 per cent in December, before decelerating to 17.5 per cent in April this year — could well be reversed. There is the issue of how much the government will hike the minimum support prices (MSPs) at which it procures crops — though the Commission for Agricultural Costs and Prices has recommended reasonable hikes, the BJP manifesto has made promises that can be interpreted in different ways. A big hike could negate many of the gains seen in food inflation. If, on the other hand, the MSP hikes are muted and the budget sees a move towards area-based subsidies, this will also encourage more production of fruit and vegetables and further dampen inflationary pressures — once farmers get per acre subsidies, the huge volatility in fruit/ vegetable prices will affect them less and encourage greater production. Similarly, if the huge stocks of rice and wheat with the FCI are dumped in the market, it will take a lot of the sting out of inflation. As a corollary, it will also mean less strain on
the budget since that is where the FCI gets the money to buy excess stocks of grain.
It is with these possibilities in mind that, in contrast to the Subbarao-Chidambaram period, the central bank’s monetary policy stance seems positively dovish. An inflation-wary RBI has not cut its policy rates, but it has signalled a willingness to do so if inflation falls below a certain trajectory — below the levels that will be seen due to the base effects over the next few months. Unlike in the past, the RBI’s policy statement seems to believe government action — on the FCI, on fiscal consolidation — will be credible. It’s over to the government now.