|End of the hiking cycle?|
|Tuesday, 26 July 2011 00:00|
Though most indicators, including a slight trending down of the high inflation rates, would suggest it is time for RBI to pause in its rate-hike cycle, it seems pretty certain RBI will hike rates by 25 bps later today. For one, since the full impact of the recent price hike in petroleum products will be felt only in the July numbers, RBI is unlikely to want to pause. Two, given that the WPI numbers for April were revised by one percentage point, from 8.7% as reported previously to 9.7%, this suggests RBI may not be entirely comfortable about the reliability of the headline inflation numbers it is seeing.
What RBI needs to keep an eye on is what’s happening in the rest of the economy. One, despite what some economists say about real interest rates being negative in India, if you take into account market interest rates instead of the repo rate, that’s not the case—lending rates today are as high as they were in 2008 when repo rates were 150 bps higher than they are today. Two, along with the impact of the policy paralysis that has gripped the government for a long time now, sharply higher interest rates have begun to bite (see the charts on the oped page today)—quarterly GDP is down for the fourth quarter in a row, as is investment, and individual consumption is down from a peak of 60.1% of GDP in the third quarter of 2009-10 to 52.6% in the fourth quarter of 2010-11. IIP is down to just 5.6%. What’s puzzling, though, is some of the other data—handsome export growth can be explained by saying some part of this is forward booking of exports in anticipation of export incentives being pruned, but that can’t be said about the sharp growth in direct taxes. Globally, growth is trending down—global manufacturing PMI is at a 23-month low—which means commodity prices should remain under control. What needs watching, though, is whether the US decides to go in for QE3 as that could upset calculations.
The critical question is how RBI sees the future, and more than the actual change in policy rates, all eyes will be on the tenor of RBI’s prognosis later today. Quarterly GDP data will be out at the end of next month and that will give a better fix on things, as IIP continues to be a volatile index. By then, there will also be more clarity about global events.