DNA Edit: A positive outlook in monetary policy, but industry needs handholding

The Reserve Bank of India’s decision to keep the key policy rates unchanged does not come as a surprise, with international oil prices on the rise and demonetization-induced deflationary effects expected to recede in the coming weeks. This is not to say that the six-member Monetary Policy Committee (MPC) meeting, coming on the heels of a minimally populistic Union Budget which restricted the fiscal deficit to acceptable limits, had no leg room to cut the policy rate by 25 basis points to 6.0 per cent. Retail inflation had declined to a two-year low of 3.41 per cent in December, largely due to a significant fall in prices of vegetables and pulses. Considering that the RBI has been aiming to keep retail inflation under five per cent in the fourth quarter and four per cent within a band of two percentage points on either side in the medium term, there were calls from many quarters for a rate cut this time.

However, the RBI has taken note that excluding food and fuel, inflation has been unyielding at 4.9 per cent since September. The OPEC agreement to cut oil production could see oil prices rise again.  The turnaround in commodity prices poses another risk to inflation management. There is also an expectation that vegetable prices will now rebound with the effects of demonetization easing. While the winter months are traditionally a period when vegetable prices decline, the policy review notes with some concern that some distress selling on account of diminished cash circulation may have caused vegetable prices to crash. The MPC has taken a long-term view of inflation noting that favourable base effects, lagged effects of demand compression, and renewed consumer spending would cause inflation to pick up momentum from the second quarter of the fiscal year 2017-18.

On the monetary policy’s imperative of aiding economic growth, the policy review offers mixed signals. On the one hand, it notices a deceleration in industrial growth and the services sector. It also partially attributed the revival of the Index of Industrial Production to a favourable base effect. However, the upturn in steel and coal production, petroleum refinery throughput, and thermal electricity generation since December and the improvement in the manufacturing Purchasing Managers’ Index (PMI) in January due to new orders and increased output reveals that future prospects continue to be strong. Despite this, the RBI does not see any possibility of bank credit to industry or private investment reviving.

After initially faltering, the remonetization exercise is progressing smoothly and will help cash-intensive sectors like retail, restaurants and transportation make a comeback. Banks, flush with funds, have already begun reducing the marginal cost-based lending rates (MCLRs) for various loans, which will significantly reduce interest payments for customers and give a boost to consumption expenditure. Agriculture is expected to perform better this year on account of rabi acreage expansion. Moreover, the Union budget included a host of schemes aimed at boosting the rural economy. The economic outlook for India is largely positive and if the economic growth for 2017-18 can rebound to 7.4 per cent as the RBI has projected, it will be a big achievement in these times of protectionist rhetoric and uncertainties dogging the macroeconomic policies of advanced countries like the US and China.