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The Finance Ministry is hopeful that the Reserve Bank of India will cut key policy rates on Tuesday. The central bank has not cut rates since April last year.
“RBI seems to be getting traction with its tight monetary policy. Core WPI inflation is now below five per cent. This would give RBI room to cut policy rates,” the Finance Ministry said in a presentation to foreign investors in Singapore during Finance Minister P. Chidambaram’s visit last week.
The wholesale price index (WPI), better known as headline inflation, was 7.18 per cent for December 2012. Although the official press release does not highlight core inflation, according to economists, it has come down to 4.2 per cent. Core inflation excludes volatile components such as food and energy from the headline figure.
In many advanced economies, core inflation is the yardstick for measuring long- term price trends and is used by their monetary authorities in determining policy. Even the RBI mentions this while issuing its policy guidance.
For example, in its mid-quarter Monetary Policy Review in December, the RBI said, “Headline inflation has been below the Reserve Bank’s projected levels over the past two months. The decline in core inflation has also been comforting. These emerging patterns reinforce the likelihood of steady moderation in inflation going into 2013-14, though inflation may edge higher over the next two months.”
It also mentioned that overall, recent inflation patterns and projections provide a basis for reinforcing its October guidance about policy easing in the fourth quarter.
“However, risks to inflation remain and accordingly, even as the policy emphasis shifts towards growth, the policy stance will remain sensitive to these risks,” it added.
Dharma Kriti Joshi, Chief Economist with Crisil, said, “Although WPI and CPI (Consumer Price Index) are above the comfort level, taking cue from core inflation and recent measures to check fiscal deficit, (the situation) is becoming conducive for policy easing.”
Industry bodies are pushing for a bigger cut in lending rates than the usual quarter or half percentage point.
“It is time the RBI went in for a bold move and slashed the repo rate by at least 100 basis points. Only then will the prolonged high interest rate cycle be broken and growth will get some breathing space for revival,” Assocham President Rajkumar N. Dhoot said.
A 25 basis point (quarter percentage point) cut will only be symbolic and will not make much difference except perhaps for a short-lived rally in the stock markets, he added.
shishir.sinha@thehindu.co.in
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