Diminishing compulsions for a rate hike: Subhada Rao

The significant run-up in inflation over October-November 2013 had fuelled expectations for a rate hike in the December 2013 monetary policy review. However, in a courageous move, the Reserve Bank of India (RBI) decided to maintain status quo by presciently citing reasons for the same.

If one needs an evidence of vindication, the recent set of inflation numbers provides the same in an unequivocal manner. The correction in both wholesale and retail inflation in the month of December 2013 has been exemplary, led by monthly correction in food prices to the tune of 6.4 per cent and 2.4 per cent, respectively, marking the sharpest sequential contraction ever observed in both the inflation series. Moreover, the concomitant decline in headline inflation has been accompanied by relatively benign sequential momentum in core inflation.

There are three noteworthy observations that need emphasis here. First, after the price correction, the expected trajectory for both WPI (wholesale price index) and CPI (consumer price index) inflation are now in sync with RBI’s estimates provided during October 2013. With uncertainty about short-term inflation estimates waning, visibility on inflation trajectory has improved.

Second, recent information points towards further moderation in food prices in the month of January. This, along with the salubrious impact coming from the return of exchange rate stability, persistent negative output gap, and the lagged impact coming from the recent monetary policy tightening, is likely to ensure that overall price pressures remain under check.

Third, the decline in inflation has coincided with receding concerns over any potential disruption in global financial markets, snowballed by “taper”. In fact, Indian markets have continued to outperform on the back of affirmation of external sector stability.

These factors should provide comfort to RBI, which has been trying to balance the weak-growth, high-inflation macro environment.

Hence, a status quo with calibration of liquidity conditions is likely to be chosen by RBI as the preferred policy outcome in its upcoming review on January 28.

Subhada Rao
Senior President & Chief economist, YES Bank