RBI says a third of slowing due to high rates
RBI has tended to confound all watchers by changing its goalposts from WPI to core inflation to CPI and now, output gap. Indeed, the only thing RBI hasn’t talked about is the GDP deflator, ironically a measure that economists will tell you is the best measure of inflation in both goods and services. While July inflation is down to a 31-month low, thanks largely to a halving of inflation in both fuels and vegetables, RBI’s traditional response has been that this is not enough. The drought will make prices rise again, fuel-price inflationary impulses remain suppressed and so on. All of which makes you wonder since the GDP deflator has also crashed from 10.1% in Q1FY12 to 6.5% in Q4FY12. Indeed, most brokerages have followed Tuesday’s WPI data with the usual this-is-a-temporary-blip commentary.
Amidst all this, RBI Deputy Governor Subir Gokarn’s statement that around a third of the slowdown was because of high interest rates is an important one. While Gokarn has couched this by suggesting RBI is only partially to blame, surely attacking the source of a third of the slowdown has to be an important policy priority? Indeed, finance minister P Chidambaram has indicated that it is at the top on his priority list. Though it is obvious a rate cut alone will not have the same impact that a rate cut along with some policy moves like raising diesel prices will, the impact of a rate cut can be significant. RBI’s own data shows a large hike in interest costs for India Inc—a lowering of this, in itself, will raise earnings and therefore make stocks look that much better. There is no doubt no sustainable investments will take place till the government gets its act together, but it’s equally clear rate cuts will help change the mood. In economic jargon, rate cuts are a necessary though not sufficient condition.