A picture is gradually emerging of the economy beginning to mend itself but it is not complete enough yet to consider a cut in interest rates. That seems to be the message from the Reserve Bank of India in its mid-quarter monetary policy review. Headline inflation has been well below the central bank’s own expectations in the last couple of months, there are signs of a rebound in growth in the third quarter with capital goods production rising after 13 successive months of decline, non-food credit is picking up and the rabi season sowing is on in full swing raising hopes of a good harvest. Yet, there are enough factors to worry about too. Retail inflation continues to rage with food prices remaining on an upward spiral. Though industrial activity picked up in October, it remains to be seen how much of it was festival-related and whether the effect of lower growth in the same month last year helped to exaggerate the picture this year. Wholesale price inflation also needs careful watching to confirm whether the declining trend is sustained. And most important of all, the deficit in the current account continues to be a major worry, casting a shadow over the balance of payments situation. The falling rupee and rising consumption have neutralised the little gains from steady crude oil prices, exerting pressure on the current deficit. In short, it is not a propitious time yet for any easing.

The markets and industry might have been disappointed with the standstill policy but the RBI has held out hope that a rate cut is not too far away. Sticking to its guidance in the October policy review, the central bank has indicated “policy easing” in the fourth quarter. This, along with its observation that the focus of monetary policy should now shift to growth from inflation will be heartening news for India Inc. which has been grumbling about the bank’s hawkish policy stance. On the flip side, the RBI may have set off expectations with its guidance and if it is unable to meet them either due to a rebound in inflation or deterioration in other economic variables, sentiment could receive a setback. The stock market fell soon after the policy announcement — there were expectations of a 0.25 percentage point cut in the cash reserve ratio — but recovered quickly once it digested the positive guidance from the RBI. What the central bank has left unsaid in its policy is that it is watching the government’s efforts towards fiscal consolidation and its ability to rein in the fiscal deficit. And till such time that the RBI is convinced on this score, the government will have no option but to walk alone.

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