If India had a monetary policy panel, it would be
If India had a monetary policy committee in place, along the lines suggested by RBI deputy governor Urjit Patel, it is possible the central bank may have cut the repo rate last September. As it turns out, the RBI tells us, four of the seven external members of the RBI’s technical advisory committee (TAC) were in favour of a cut; while three wanted a 25bps rate cut, the fourth wanted a 50bps cut with a clear statement that further cuts were not envisaged in the near-term. While Governor Raghuram Rajan rejected their advice since his view is the inflation numbers are distorted by the base effect, as economists, the TAC members were also aware of this—the external members on TAC who attended the meeting were Y H Malegam, Shankar Acharya, Arvind Virmani, Indira Rajaraman, Errol D’Souza, Ashima Goyal, and Chetan Ghate. Indeed, the fall in inflation levels goes beyond any explanation of the base effect. CPI has fallen from 11.2% in November 2013 to 8% in February 2014 and to 6.5% in September 2014—indeed, given inflation levels in September 2013 were not dramatically different from those in the few months prior to this, it is not even clear what the base effect really is.
Apart from the pace at which inflation is falling, the larger point is that there are few drivers to take it back up again with factory output continuing to disappoint at 0.4% for August. The 20% fall in oil prices, if it sustains, will in itself shave off 1.8 percentage points from the CPI over the next 12 months; add to this the disinflationary impact of the fall in other raw material prices following the dramatic slowdown of China and the impact this will have in worsening the European collapse. With credit growth in India down to decadal lows, though, there is some softening in rates even without RBI’s actions. With GSec rates coming off, if banks want to earn higher spreads, they simply have to go out and lend to industry; and given there is little demand, these loans are also being given at lower spreads, though as yet this is limited to certain types of customers. Spreading it to all customers, of course, seems difficult till Governor Rajan decides to cut rates.