Comment: Sonal Verma, India Economist, Nomura Financial Advisory

Pause for now

Unlike the last two quarters, when RBI’s main worry was generalised inflation, the bigger concern now appears to be the structural nature of food inflation and rising asset prices. The cumulative 300-basis-point increase in effective policy rates from the trough is likely to contain inflation, while tighter prudential norms will aid in containing any overheating in the housing market. Looking ahead, RBI has hinted at a pause in the near term. In its forward looking statement, RBI states that based on the current growth-inflation trends, “the likelihood of further rate actions in the immediate future is relatively low”. Therefore, only sharp deviations from base line will elicit future policy response.

Growth appears to be consolidating around trend. Our leading economic index has been pointing to a moderation in the non-agriculture GDP in the second half of the current financial year after a sharp rebound in the first half, due to base effects and an end to inventory restocking. While food inflation has risen structurally, the seasonal component is likely to ease after November, once harvesting season begins. Tightening policy screws to contain structural food inflation can backfire beyond a threshold, particularly when liquidity is as tight as it is now.