A 50bps rate cut with ample liquidity is needed PDF Print E-mail
Thursday, 04 April 2019 04:57
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Growth slowing, investment is poor and inflation is well within control; India’s real rates amongst highest globally


With food inflation gradually reversing from its earlier phase of contraction—from an average of minus 1.5% over the previous three months, this was minus 0.1% in the latest CPI numbers—and core inflation still high at 5.3%, there are many who believe the inflation battle hasn’t been won and that RBI needs to remain vigilant. Indeed, policies such as PM Kisan—and the Congress’s NYAY, were it to come to power—will all ensure that food inflation starts to pick up. The question, however, is how soon this will happen, and whether inflation will remain under control following this. Right now, most economists seem to be of the view that, in the next one year, inflation will remain below the 4% level the central bank is comfortable with. More so since, GDP growth has already begun to moderate; indeed, as compared to the 7.2% projection in January, the CSO’s February projections put it at 7%. Most high-frequency numbers show a similar slowing—at around 4% for FY19, growth in passenger vehicle sales, for instance, is likely to be the slowest in four years.

Indeed, with not enough jobs being created—or with jobs being created, but offering low salaries, if you go by the latest narrative put out—it is not surprising that consumption growth, which was the single bright spot in terms of growth, has also started slowing. With no signs of private investment picking up, it is likely FY20 will see a sub-7% growth—according to CMIE data, fresh public and private sector investment announcements in the March quarter were 16% lower than those in the December quarter and 46% lower than the year-ago period. In addition to domestic factors, the global situation has only worsened, and even if there is no recession—and there is just a slowing down of global growth—this will only make things worse for India. Indeed, the markets seem to be pricing in a rate cut from the Fed this year, a sign of how fragile growth can be. Apart from what a rate cut can do for the economy, it is worth keeping in mind that India’s real rates of interest are amongst the highest in the world and, along with India’s high rates of corporate tax, make investment quite unattractive. And, while the impact of bad domestic policies in various sectors is a key reason, this also accounts for why, from a high of 3.4% of GDP in FY09, FDI levels are right now at 2.3% of GDP.

Cutting rates, of course, is of little help if there isn’t enough transmission, and that is why ensuring enough liquidity is critical. While RBI’s dollar-rupee swap has added to liquidity quite effectively, the fact that the new year has started and government spending will pick up will also help, as will the increased election spending. In which case, it is fair to expect some rate cuts if RBI’s monetary policy committee (MPC) goes in for a large enough repo cut later today. While it is not clear whether members of the MPC will be aggressive enough, new Governor Shaktikanta Das has indicated that, as opposed to the central bank focusing primarily on inflation, he would like GDP to be a focus area as well (at least when inflation is under control).



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