www.thesuniljain.com

Tea Leaves PDF Print E-mail
Tuesday, 29 October 2013 00:16
AddThis Social Bookmark Button

RBI would do well to read the forecasters’ survey which projects an economy not bottoming out

Not surprisingly, RBI’s macro outlook doesn’t provide too much of a clue as to whether Governor Rajan will raise repo rate later today since it points to both the need to get growth back on track as well as the need to control inflation which has started going up a little. But what RBI needs to keep in mind, indeed it points to this in its outlook, is that food inflation will trend down a bit once the new crop comes in; and, as our graphic on page 1 points out, food inflation control cannot be fixed without big supply-side changes that ensure adequate growth in fruits and vegetables from where inflation is emanating. The problem is that while these products have boom-bust profit cycles, the agricultural economy—this has been worsened by the Food Security Act—is geared to keeping profits on cereal production high.

Were RBI to read the tea leaves right, despite there being ‘upside risk’ to inflation rising, producers have virtually no pricing power—indeed, given the rupee stabilising, some part of the inflation potential has been taken care of. Indeed, with the median FY14 forecast of GDP growth being cut from 5.7% in the last survey to 4.8% now and from 6.5% to 5.8% for FY15, it is clear the economy needs a growth shot. If RBI raises rates, and that too on the basis of a CPI index that looks dicey and has a long way to stabilise, that would be unfortunate.

 

You are here  : Home Economy Tea Leaves