A week before the Reserve Bank of India’s (RBI’s) scheduled credit policy review on March 19, the time for anticipating rate cuts has come. As always, the RBI has to reckon with economic data which yield conflicting signals. But what is special to this policy statement is that it will be the first after the budget and the last for this financial year. The significance of being in the shadow of the budget, as it were, is this. The Finance Minister has made it very clear that having budgeted for a reduction in the fiscal deficit, thus delivering on his promise to keep it within reasonable limits, he expects the RBI to ease monetary policy.

There need not be a quid pro quo — after all monetary policy has to take note of inflation challenges, but such has been the impact of the budget messages, backed, as usual, by some strong lobbying that the RBI will have to reduce the policy rate by at least 0.25 percentage points. The budget has had other messages for the RBI, for instance, in the area of incentivising household savings and moderating the demand for gold. But schemes such as inflation-linked bonds would most probably be announced along with the annual policy statement.

Meantime, ahead of the mid-quarter policy statement, there has been a plethora of economic news. Two sets of inflation data have come in. The data on Tuesday showed CPI inflation (based on the new index) at an all-time high of 10.91 per cent in February. Last year, at the same time, it was 8.83 per cent. The fact that it has been ruling well above 10 per cent in recent months is no consolation. This data, by itself, should suggest, at least, status quo on the interest rates (A rate increase is unthinkable in the present context).

However, the WPI (wholesale price index) inflation for February which came in on Thursday at 6.84 per cent complicates the picture. Though lower on a year-on-year basis, it is higher than the three-year low of 6.62 per cent in January. Inflation has been slowing steadily since September when it was over 8 per cent. The RBI reduced the repo rate by 0.25 percentage points in January. Headline inflation numbers probably reduce the leeway but then core inflation — non-food, non-fuel manufactured inflation has declined to 3.76 per cent, the lowest in almost three years. This lends credence to the argument that even on strict economic grounds, the central bank will reduce policy rates by 0.25 percentage points.

On the face of it, the industrial output data (IIP numbers) for January, released on Tuesday, should give rise to optimism as it comfortably exceeded analysts’ expectations. However, there are no clear-cut signals. The IIP was up by 2.4 per cent on a year-on-year basis having declined in the two previous months. However, to give it a better perspective, during April-January 2013, industrial output rose by a measly 1 per cent compared to an already unimpressive performance over the same period in 2012. Despite the welcome reversal in direction, the industrial output figures for January do not suggest “a bottoming out” of the economy and that a recovery is in sight. While the critical manufacturing sector — it accounts for 80 per cent of the index — has grown by 2.7 per cent, the performance of individual segments has varied widely. On balance, therefore, a nuanced interpretation of the IIP data would suggest a softer interest rate policy.

There is another dimension to the debate. Even if the policy rates are cut, the market lending and deposit rates may not fall. Banks may find it difficult to transmit policy signals.

The credit-deposit ratio is at an all-time high of 78.86 per cent. Deposit growth has been sluggish growing by just 12.7 per cent (according to latest figures), lagging considerably behind growth in advances (16 per cent).

Faced with a rather desperate position, leading banks, including SBI, have hiked, rather than reduce their deposit rates. The impetus has come also from the tight liquidity conditions, but the hike in deposit rates, it is hoped, will herald a new line of thinking among banks which view depositors as important constituencies by themselves.

narasimhan.crl@thehindu.co.in