The Reserve Bank of India (RBI) released its mid-quarter monetary policy review on Tuesday and, as was widely expected, it kept the policy rates unchanged. The repo rate under the liquidity adjustment facility for banks will remain eight per cent, and the cash reserve ratio (CRR) will remain 4.25 per cent of their net demand and time liabilities. Whatever small expectations had been raised following a moderation in wholesale price inflation in November – which reached its lowest level in months at 7.24 per cent – were dashed. It is true that consumer price inflation, driven by primary goods prices, remains high at 9.9 per cent, much higher than in comparable economies — the RBI has shifted emphasis recently from tracking “core” inflation to tracking consumer prices.
Some hope, however, was held out in that the RBI said that it was now prepared to tackle the severe growth slowdown. Inflation, it said, was likely to see “steady moderation” going into 2013-14, and “monetary policy has to increasingly shift focus and respond to threats to growth from this point onwards”. This is, of course, merely a reiteration of the claim it made one year ago, saying that monetary policy had shifted from a contractionary to an expansionary stance. However, it means that the markets now expect a cut, in CRR at least, in six weeks. It appears that the RBI has taken the decision to avoid surprising the markets, even positively. Past governors of the RBI have been known to deliver positive surprises that can shift the markets, and initiate pre-emptive or anticipatory moves to deal with negative developments on the horizon. It appears the current dispensation in the RBI underestimates the usefulness of such actions. It is far from certain whether that is the correct approach at a time when India should be worried about an “investment cliff” — the fact that investment has collapsed, that there are no orders in the pipeline, and that manufacturing has essentially stopped expanding. The full effects of this freeze have still not played themselves out, and counteractive action from the RBI to support the private sector in advance might have been indicated.
Meanwhile, the question remains: what of fiscal consolidation? Although inflation is moderating, there remains considerable suppressed inflation in the economy thanks to unsustainable government subsidies. India also has worryingly high current account and fiscal deficits, which means that prices cannot be kept low by government fiat for much longer. The government’s mid-year economic analysis, released on Monday by Chief Economic Adviser Raghuram Rajan, continues to maintain that the Centre is on track to a 5.3 per cent fiscal deficit for 2012-13. In fact, short of some juggling of the numbers, it is difficult to see how that target will be met. This is because subsidies have not been controlled, and disinvestment and auction targets have been way below what was budgeted. The RBI’s review carefully avoided mentioning this subject, but it will have been on the governor’s mind. Some sort of cut may arrive as the market expects, but it is hard to see how, without necessary action from New Delhi, monetary easing can be deep or sustained.