Time to cut rates PDF Print E-mail
Monday, 23 January 2012 00:00
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A boost to growth will also help forex inflows

Market wisdom is that RBI won’t do much in its policy tomorrow as, the continuous fall in food inflation notwithstanding, the back of inflation still hasn’t been broken. Though WPI inflation fell to a two-year low of 7.5% in December, largely due to a fall in food inflation to 2.6% (the base effect was a big factor), it is argued that core inflation remains high though it has eased to a 5-month low. If the idea of hiking rates, the logic goes, was to break inflation’s back, an early easing of rates will bring back inflationary pressure. There is then the issue of government spending. If government spending has gone totally out of whack (the budget will tell us just how much) and it looks as if next year may not be much better especially if the Food Security Bill is to be operationalised from FY13, RBI may wish to wait a bit.

There are, however, several other reasons for why RBI needs to act tomorrow. For one, all signs are the global economy continues to remain in trouble—World Bank has just lowered its projections significantly and IMF is likely to follow tomorrow—so this will mean lower inflationary pressures. Two, though there is little let up in the slowing economy—even two-wheeler sales confirm this—there is some evidence ocvcf things turning around whether it is the rupee strengthening on the back of large FII inflows or the Sensex looking up. More important, though the government has a long haul ahead in getting the Opposition to help pass critical Bills, there are some signs of change. The power ministry has finally notified ‘open access’ that will help getting finance easier for generating firms, there has been progress on the move towards GST with the state finance ministers approving a negative list of services that the Centre can tax, NHAI is giving out 20 km of road contracts a day … paradoxically, the Supreme Court judgment that went against the taxman in the Vodafone case has helped improve investor outlook. What’s missing in all this, however, is a big push that can help stimulate private investment. It can be no one’s case that only high interest rates are keeping projects on hold, but they are a definite factor. Also worth keeping in mind that, with inflation easing, keeping policy rates unchanged implies a hiking of real interest rates. That, surely, is not something RBI would want to be doing at a time when the economy continues to slow.



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