An economy reeling from an extended, four-quarter slowdown worsened by the implementation of GST and demonetisation, was looking up to the Reserve Bank of India for salve but the latter failed to provide any in its fourth bi-monthly monetary policy review. The RBI acknowledged the slowdown by marking down its growth rate for 2017-18 to 6.7 per cent (from 7.3 per cent in the last policy review) but that’s about as far as it would go given that inflation has perked up in the last couple of months. The Centre sent out a signal on policy eve by cutting excise duty on petrol and diesel in an obvious effort to prevent pass-through of higher fuel prices to inflation. But it was obviously too little too late as the central bank was consumed by the uptrend in core, non-food, non-fuel inflation — the CPI has jumped up two percentage points in the last two months and when the September print comes out in a week’s time, it is likely to show a continuation of the rising trend. The RBI’s revised inflation projection of 4.2-4.6 per cent for the second half of this fiscal shoots past the median rate of 4 per cent that it is committed to uphold in terms of the monetary policy framework agreement that it has signed with the Centre.
The central bank has flagged off the impact of farm loan waivers by some States, a lower kharif harvest going by the first advance estimate and price revisions from the implementation of GST as posing upside risks to inflation. The impact of Sates implementing their own pay commissions’ awards for employees is reckoned as a factor that might add as much as a percentage point to inflation projections over the next 18-24 months. While these are indeed valid factors, one wishes the RBI had also given greater weight to the sagging growth impulses in the economy. Given the overall fiscal scenario and the commitment to deficit targets, the Centre’s hands are tied on any possible stimulus, though there has been speculation of such a package being round the corner. A rate cut, even if only by 25 basis points, would have been a shot in the arm for industry and the corporate sector which are desperately looking for a growth booster.
Real interest rates, even after this cycle of rate cuts that began in January 2015, are still over 2 per cent and closer to 3 per cent, depending on the benchmark one chooses for comparison. This is considerably higher than the 1.5-2 per cent level that is seen as reasonable by most economists for India. It is not clear how much consideration is given to this aspect by the central bank while it frames its monetary policy. It can only be hoped that the present neutral stance of the RBI is not a signal that we’re at the end of the rate-easing cycle, for there is some way to go yet before real rates reach more acceptable levels.