Growth is down, inflation is crushed, but RBI unmoved
Every indicator you can possibly think of is looking down, from exports to industrial production, from overall consumption and investment to even credit growth. To the extent October numbers showed an IIP surge, it was due to inexplicable growth such as in automobiles—November growth for automobiles is already negative and the fact that Diwali was celebrated in November this year as opposed to October last year also played a big role. Headline WPI, it is true, hasn’t changed much since January—and each month’s inflation numbers have tended to get revised upwards by around 25-50 bps—but core WPI is down from around 7% in January to a little over 4% now, a 3-year low. And yet, RBI remained unmoved and refused to lower the policy rate on Tuesday. This despite the fact that RBI itself said the October IIP was a bit of a statistical illusion and “the seasonally adjusted three-month moving average annualised momentum indicator also points to ebbing of inflationary pressures”. Indeed, given this, RBI said “monetary policy has to increasingly shift focus and respond to the threats to growth from this point onwards … Overall, recent inflation patterns and projections provide a basis for reinforcing our October guidance about policy easing in the fourth quarter.”
So if headline inflation has been below RBI’s projected levels for the last two months, why didn’t RBI cut rates? Because, as it has done in the past, after talking of core inflation for so long, RBI is now talking of retail inflation remaining elevated. But RBI has to know monetary policy cannot realistically hope to tackle retail inflation or even seasonal WPI—which is why central banks focus on core inflation.
To be fair to RBI though, the government hasn’t covered itself with glory either since increases in MSP cause inflation, FCI’s refusal to dump its huge stocks of grain has fuelled food inflation and MGNREGA-plus-MSPs have certainly boosted wage inflation. And its failure to clear projects has worsened supply bottlenecks. But this is a given. If the government is cutting back on this behaviour, and the evidence suggests it is (albeit slowly), RBI needs to respond. Waiting to stamp out retail inflation first means the RBI will continue to be behind the curve.