Many people have a direct stake in the credit policy as interest rate movements have a bearing on a variety of loans

The time for another policy statement from the Reserve Bank of India has come. On Tuesday, the apex bank will present its policy review for the third quarter of this fiscal. As usual, the interest rate policy dominates the public discourse. In a way, inflation and its presumed antidote, interest rate hikes, have never receded from public consciousness.

Every comment or observation of the Governor and senior RBI officials made in-between policy statements are taken note of. Newspapers and TV news channels carry an in-depth analysis of even their off-the-cuff statements.

The only economic news that figures even larger in public consciousness is, of course, the Union budget but that is still three months away. The budget has always invited public scrutiny and media attention. But it is curious that the credit policy should come even close to garnering attention. What was once considered to be an arcane subject is now something in which even the common man finds relevance.

Two factors are responsible for ‘democratising' economic news. One has been a fairly successful campaign of demystifying subjects such as credit policies. That may be due to the fact that policy statements are announced eight times a year as against just twice not so long ago. With one statement every 90 days or so, there is practically round the year coverage, which is hard to ignore.

The second reason is that the common man nowadays has a vested interest in policy making, which was previously not so obvious. Two examples will suffice. Interest rate movements have a bearing on a variety of loans, including home loans. So many more people have a direct stake in the credit policy. Two, the nuances of inflation figures may not be so easily understood but the fact that inflation has been consistently high is realised by everyone, partly because the RBI's policy statements din it into them so frequently. WPI inflation for September at 9.72 per cent is only marginally lower than the 9.78 per cent recorded in August. In September, 2010, it was 8.98 per cent.

So what will the RBI do on Tuesday? As always, it will have to sift through conflicting data and opinions. Going by the stickiness of the inflation data, there is very little likelihood of RBI ‘pausing' its anti-inflation drive. For quite sometime now, the RBI has been articulating its role in containing inflation, even if that entails sacrificing a portion of the growth momentum. For 20 consecutive months, the WPI has been above 8 per cent. For ordinary citizens, the hope that prices will come down has proved illusory what with the persistently high food prices, which affect their day-to-day lives.

Inflation expectations have hardened for other reasons too. For instance, the recent hike in the retail prices of petrol, cooking gas and kerosene notwithstanding, there is an expectation that prices of these can go up. High inflation expectations in turn have fuelled the demand for higher wages. However, the recent industrial output data show that the slowdown in the economy will be more pronounced than was realised earlier.

The Index of Industrial Production (IIP) is notoriously volatile and recently no less than the RBI Governor has questioned the accuracy of such data and its relevance to monetary policy formulation. Yet, successive IIP figures point to a definite downward drift in industrial production. Other data such as car sales, cement despatches and so on also point to an overall slowdown.

Therefore, the RBI is confronted with persistently high inflation and a visible slowdown of the economy. It will be interesting to see the central bank's growth estimate for the year but many forecasters are placing it in the sub-7.5 per cent category.

Case for a pause

Before any policy meeting, there is a clamour to maintain the status quo on interest rates. But the RBI has not heeded to those appeals and hiked the policy rates, citing inflation concerns.

This time, the clamour has been more voluble than at any time in the recent past. Apart from economic slowdown, which is now felt across several sectors and the macroeconomy, the RBI, should take note of the worsening global economic situation and signal a pause. Many central banks, those of the U.K., South Korea, the Philippines and Malaysia have recently signalled their intention to wait and watch.

However, it is highly unlikely that the RBI will follow suit. A 25-basis point hike in the repo rates seems to be the most likely policy option.

A course of action that is highly unlikely to be accepted has been suggested by a small number of people. Economic Adviser to the Finance Minister Kaushik Basu is among those who advocated an interest rate cut. This is radically different from asking the central bank to maintain the status quo. Some countries, including Brazil, Turkey and Indonesia have lowered their benchmark rates. The primary motivation is to discourage foreign flows. Given India's circumstances, this course will not find favour for now.