Accent will be on checking the slowdown

The significance of RBI's credit policy announcement scheduled for Tuesday January 24 can hardly be overstated. As has been the case before every policy statement, there is a riveting interest on what the central bank will do with interest rates. In its previous policy statement (mid-quarter monetary policy review: December, 2011) the RBI maintained the status quo — altering neither the policy repo rate nor the CRR. The repo rate has remained at 8.5 per cent at the CRR at 6 per cent.

The RBI had said that it will make a formal numerical assessment of its growth and inflation projections for 2011-12 in the third quarter review. By December, it becoming clearer by the day that growth projections made by all and sundry for the current year (2011-12) made earlier would need to be lowered drastically. It has, of course, been a little better with inflation outlook. The year-end projection of 7 per cent was retained in the December statement. The RBI, always more conservative than other official forecasters, had pegged GDP growth at 7 per cent in its second quarter review.

Bleak scenario

Since December, there have been very few developments that give rise to optimism even while the general scenario remains bleak.

The World Bank's recent downward revision of India's growth prospects was by no means unexpected. It merely follows the trend set by international rating agencies. The Finance Minister has admitted to fiscal slippages. The current account deficit has been widening on the back of growing merchandise trade imbalance. That is causing serious concern in a context where global capital flows have been even more fleet-footed than at any time in the recent past. The eurozone crisis continues to fester and on many fronts getting worse.

The only positive news relates to two items of economic data: industrial output growth figures for November and headline inflation for December. The index of industrial production rebounded sharply in November by 5.9 per cent after contracting 5.1 per cent in October. The stubbornly high inflation rate (WPI) dipped to 7.47 per cent in November, its lowest level since 2009, having remained close to double digits during the greater part of 2010. As recently as November, it was above 9 per cent.

Industrial production

Welcome as these two developments are, on a closer examination, they loose much of their sheen. Take the IIP data first. The point has been made several times before that it is notoriously fickle. Even the RBI Governor has questioned the usefulness of the IIP data in formulating monetary policy.

Such general criticisms aside, the bounce back in November has been possible by just two or three favourable factors. Electricity generation was up by an amazing 14.6 per cent. It is highly unlikely that the tempo can be maintained given the deep financial troubles that the power sector is facing now. Besides, there is a chronic problem of fuel linkages, especially coal.

Robust consumer demand (up by over 13 per cent) is not unexceptional during the festival season. It is highly doubtful whether it will sustain in the coming months. Credit offtake from banks has not picked up. Capital goods and intermediate goods have shown little growth and that does not augur well for industrial revival.


Inflation has clearly benefited from same favourable statistics. The base effect is in operation here. In December, 2010, it was already above 9 per cent. In percentage terms, therefore, the year-on-year increase in December, 2011, appears quite favourable.

Besides, manufactured goods inflation remains persistently high. Global cues are hardly encouraging and it is certain that the RBI, like many others, will revise downwards its growth forecasts.

In short, while inflation concerns have not gone away, the accent of monetary policy will be on growth, specifically in arresting the slowdown.