If the Reserve Bank of India’s macroeconomic review on the eve of its monetary policy is anything to go by, the central bank is unlikely to cut repo rates—or the CRR one that is required for monetary transmission—by a significant amount. In view of macro-financial risks that stay significant, the statement says, “the space for action for 2013-14 remains very limited”. RBI follows this up with the usual homilies on the need to resolve supply bottlenecks and on the governance issues that are impeding investments, among others. The point, however, underscored by the latest PMI, and countless data before that, is that demand pressures are at multi-year lows. In other words, the fears that RBI talks about—of macro-risks returning in the form of higher inflation—look a bit unlikely right now. Manufacturing PMI is at a 17-month low and the output sub-index is at a 4-year low. That is why March WPI was at a 39-month low. Consumer prices are undoubtedly high but, with services GDP beginning to fall, it is only a matter of time before core CPI also begins to fall. Let’s keep in mind that manufacturing WPI started falling only after a few quarters of manufacturing GDP declining.
Critics argue that, even if RBI were to lower rates of interest, this would make no difference because India Inc is too bloated, the projects planned were too ambitious and made sense in more buoyant times, the government is not clearing projects in time … the list goes on. All of these, in fact, are reasons for a 50 bps rate cut. Indeed, lower rates, to the extent they stimulate investment, will only help temper inflationary impulses. Lower interest rates will help India Inc get less bloated, they will help projects look more viable. No one denies India’s vulnerabilities, but with global commodity prices softening, the CAD position already looks better. The choice before RBI Governor D Subbarao is whether, in his last policy, he wants to be ahead of the curve or behind it.