By raising the repo rate 25 basis points (bps) to 8.25% on Friday to signal continuation of its anti-inflation stance, the Reserve Bank of India (RBI) is buying time on two contrasting variables — inflation and growth.
For governor Duvvuri Subbarao, it’s a return to ‘baby steps’ before deciding which path to trod, given the intractability of the inflation problem and the fast deterioration of the global economy.
On inflation, the RBI hasn’t acted as if its ‘hair is on fire’ — to use an en vogue phrase in central banking these days — as it has done since April by raising the repo rate 125 bps in a span of 12 weeks.
Else, at 9.8% for August — a rise from 9.2% in July — the Wholesale Price Index-based inflation made the case for another 50 bps yank-up.
More so because core inflation at 7.7% for August is twice the long-term average.
A second 50 bps hike could also have ended the rate tightening cycle sooner, instead of dragging it; the six-weekly rate hikes are causing immense fatigue in the system.
Come to think of it, the case for Subbarao to press the pause button had merit too: economic growth is slowing — more so in the developed nations — and inflation isn’t coming down for want of supply-easing measures from the government.
After raising rates by 150 bps since May 3, the central bank is clearly stamping on inflation expectations even as it hopes the cumulative lag effect of its actions will smother demand.
Yet, inflation has obstinately remained over 9% in the last 9 months.
In its July review, the RBI had said its 50 bps hike would show the ‘credibility’ of its ‘commitment’ to controlling inflation. It also said ‘stronger’ steps would be needed ahead because ‘complementary measures’ were absent on the supply side from the government.
Six weeks later, the stance is mainly reinforcing the impact of past measures and signalling the risks of a ‘premature’ take on inflation expectations. The RBI said the stance will change if there are ‘signs of downward movement in the inflationary trajectory’.
Growth, it said, will slow more than the near-8% projected in July, partly due to the global deceleration and partly the tightening measures.
But the lead indicators which the RBI uses to execute policy — such as credit growth, money stock growth and liquidity — are above its forecasts.
Industrial output, if one excludes the volatile capital goods component, rose 6.7% in July compared with 4.4% in June.
As for the Purchasing Managers’ Index, it has declined, but is still showing expansion in industrial output.
The macros, thus, have not slowed enough for the RBI to start pressing the brake.
But then, can a 25 bps hike engineer the kind of slowdown the RBI wants? Not immediately, unless the global slowdown manifests in a severe form — and very quickly — in India.
Economists say the ball is literally in the government’s court —measures to ease supply bottlenecks are imperative to win the price fight.
As for the RBI’s guidance, well it will remain hazy in the circumstances.
The market was betting Friday’s review will be a defining one, signalling when the policy will shift to neutral so that companies can dust off expansion plans.
That hasn’t happened.
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