StatsGuru: 16-December-2013

RBI's pressure points while formulating monetary policy

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The Reserve Bank of India (RBI) is in the process of formulating a review of its monetary policy. What are the pressures playing on its decision? As Table 1 shows, since January 2012, the Wholesale Price Index (WPI), the Consumer Price Index (CPI) and WPI-manufacturing have all diverged significantly. CPI has risen 11 per cent year-on-year, while WPI-manufacturing is very low indeed by Indian standards, at 2.5 per cent year-on-year when last recorded.

This reflects two things. First, as Table 2 shows, food inflation - especially as measured by the CPI - has spiked at over 18 per cent year-on-year, driving up overall figures. And second, as Table 3 shows, the industrial growth has slowed, ensuring that WPI-manufacturing is low. This industrial growth freeze has had various other effects. India's overall growth has collapsed, shown in Table 4 - even with an uptick in the last recorded quarter, it is still below five per cent. And, as the Purchasing Managers' Index shows, in Table 5, there is little hope for a revival anytime soon. A revival will need lower interest rates, but high food inflation constrains RBI. The central bank should also note, while deposit growth rates have begun to increase of late - as shown in Table 6 - the growth rate of commercial credit has slowed - suggesting that interest rates have begun to attract depositors, but pinch borrowers.

Meanwhile, the government's profligacy has not helped. As Table 7 reveals, 10-year government securities now have a pretty high yield, crowding out other investment opportunities. Table 8 shows how gross borrowing of central and state governments have expanded in recent years.