RBI readying itself for a long rate freeze?
The Reserve Bank rightly held back on pruning key interest rates in its monetary policy announced on Thursday, as inflationary pressures overtook concerns about India’s slowing growth. This pause however may be a disappointingly long one for those looking for a cheap interest rate regime, given RBI’s inflation forecast. Retail inflation on an annualised basis had surged to 7.35% in December, the highest since July 2014, on the back of high food prices. Trends indicate the inflation rate may have gone up in January, given the fact that over half of the retail inflation basket is determined by food prices.
The central bank itself has forecast inflation in the ongoing fourth quarter of this financial year at 6.5%, which it feels could then move downwards to 5.4-5% in the first half of the coming fiscal. It seems to feel inflation will be within its comfort range only in the second half when it is projected to come down to the 4-3.8%. All this seems to indicate that RBI could be readying itself for a long freeze on rates. Like all prudent central banks, RBI believes inflation is a tax on the poor and keeping a lid on it is as important as growth imperatives. That India needs growth triggers is a given, especially as GDP growth fell to a more than six-year low of 4.5% in the July-September quarter and may have fallen further in the October-December quarter if analysis by several bodies including research firm Nomura is to be believed.
Though RBI seems to believe tax cuts offered in this year’s Budget and the extra expenditure—represented by a 9.18% increase in total expenditure and 15.33% in capital expenditure by the Centre—should stimulate GDP growth, many economic pundits think more impetus may be needed. Obviously, RBI does also need to tread the path of growth as soon as possible and use its considerable monetary clout to resuscitate the economy. A beginning has been made by doing away with CRR requirements for loans to automobile, home and MSME segments. But more will be required of both the Union government and RBI if the Indian economy is to rediscover its mojo.