Apart from the April IIP numbers that were around 0.6% once you take out the inexplicable hike in apparel production, May WPI numbers signal the same dramatic weakening of economic impulses in the economy. At 4.7%, WPI is well within RBI’s comfort zone and the 2.4% core WPI is way below RBI’s comfort zone of 4%. The 42-month low WPI, it has to be kept in mind, is despite cereals continuing to rise at 16% levels for several months now and electricity WPI rising a whopping 28% after several SEBs announced steep tariff hikes in order to become eligible for the bank-financed restructuring programme. With manufactured goods inflation down to just 3.1% as compared to 5% in even January, and a good monsoon expected to dampen food prices further—fruits and vegetables WPI contracted 0.7% in April-May this year in comparison with a hike of 13% in the same period last year—this is the time to ask RBI for another rate cut, preferably along with a CRR cut to ensure there is monetary transmission. This would both help stimulate consumer demand as well as investment demand, both vital to growth of the economy—consumer demand that held up even in the aftermath of the global financial crisis has collapsed and, as compared to a growth of 8% in FY12, this collapsed to 4% in FY13. While many argue that lower interest rates in themselves will not stimulate investment growth, in a situation where India Inc is so leveraged, lower interest rates are also a big help, more so given how the sharply worsening rupee is adding to
India Inc’s debt service burden.
What makes today’s monetary policy different, however, is the dramatic collapse in the rupee and, though it has retracted from the near-59 levels of the middle of last week, the rupee remains very vulnerable thanks to the high current account deficit (CAD). Since early 2008, the rupee has depreciated the most against the dollar in comparison with any other Asian currency, with especially bad spells in October 2008, November-December 2011 and May-June 2012, apart from the one we’re in the middle of. The current crisis, of course, has been accentuated by the withdrawal of FIIs from both the debt and equity markets—and that, in turn, was the result of US yields rising in response to the Fed’s possible withdrawal of liquidity while Indian bond yields have fallen. In such a situation, RBI may not want to lower this differential further. More important, since the Fed’s open market committee meeting is over by the 19th, it makes sense to wait to see what emerges from the meeting—perhaps some more clarity on the Fed’s future policy stance may help calm global markets. By the end of the month, there will also be some more data, on the CAD, for RBI to base its actions on. If the Fed meeting doesn’t add to more turmoil, RBI should be able to make rate cuts in its July policy since falling WPI means real yields are rising and will make India an attractive destination for debt once again. More so since, if oil remains soft and gold imports slow, as they are, the BoP numbers may also provide some relief.