The Reserve Bank of India will unveil the first quarter review of its annual monetary policy on Tuesday.
After the annual policy statement, there was a mid-quarter review on June 16. The RBI has ensured that the interval between two policy statements is not more than 90 days. The number of policy statements in a year is eight.
This column attempts to capture the thrust of the recent policy statements — the annual policy as well as the June mid-quarter review — and looks at what could be in store in the quarterly review. In the very nature of things, there cannot be a sharp reversal of monetary policy goals in such a short-time but there could be a change in emphasis.
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Policy statements are built around major developments, domestic as well as international. Between June 16 and now, there was an important data release (the IIP numbers for May).
The Centre has raised the petrol, kerosene and cooking gas prices on June 24. Inflation for June has surged to 9.44 per cent from 9.06 per cent in May.
Outside India, the euro debt crisis has worsened and threatens to become a global problem.
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All these are bound to figure in the review.
Policy response
There is no escaping the fact that inflation will remain in focus not only in the forthcoming quarterly statement but, for a long time to come, in the succeeding ones as well. It also seems given that the policy rates will go up although by how much seems to be the only question. Just as was the case in mid-June, policymakers were given a rude reminder that inflation continues to be the biggest worry when the latest inflation figures came in.
This time a strong case for not hiking the rates has come from banks. Public sector banks normally do not air their views, especially those that seem contrarian, in public.
They are more accustomed to support the government after the policy announcement is made, never mind what impact the policy changes have wrought on their businesses and balance sheets.
It is, therefore, good to see a report that top bankers, at a scheduled pre-monetary policy meeting with the RBI, may argue for a pause (in the upward movement of rates) on the ground that the economy is slowing down and that is getting reflected in the lower figures for loan sanctions and disbursements across the banking sector. Besides, reports speak of fewer new loan applications.
The message is that there is a distinct slowdown in industrial activity since December last. The most recent data on industrial output is cited to buttress the plea that the RBI should not hike policy rates on July 26.
Recent statistics
According to the recently released (mid-July) IIP data, industrial output in May was up by 5.6 per cent, the lowest figure in nine months against 8.5 per cent last year. Manufacturing and mining, which together account for a large share of IIP, declined — the former from 8.9 per cent to 5.6 per cent and the latter from 7.9 per cent to just 1.4 per cent.
Electricity was one sector that recorded a growth -10.3 per cent in May (6.3 per cent last year). Within manufacturing, the lower figures for capital and intermediate goods are indicative of declining investment and industrial activity.
The implication is that higher interest rates have moderated demand.
Will the RBI which has been hiking interest rates heed the plea of large sections and ‘pause'? The answer to that obviously depends on how serious the inflation is viewed, not just a number approaching double digits, and the adverse impact it has on expectations. Second, it is not correct to attribute the slowdown in industry to higher interest rates alone. There is no doubt at all that major policy imbroglios over such matters as land acquisition and environmental clearances for sensitive projects have contributed to the slowdown. The poor performance of the mining sector in IIP is attributed largely to the absence of clear-cut government policies, noticeably on environmental issues.
Besides, a major factor affecting investors' confidence — something that is never articulated the way it should be — is the indecisiveness in decision making at different levels of government. It is not for the first time that public servants have played it safe but the present climate, where every major decision of the government is scrutinised and ‘scams' spotted, is unique and does not augur well for economic growth.
Big issues
But those are big issues that transcend the major policy dilemma that the RBI has faced for long, namely, growth versus inflation.
Even as the Finance Minister has tried to boost the investor sentiment by painting an optimistic picture of the prospects ahead, it seems certain that everyone is getting used to the prospects of lower growth. The RBI had already lowered its estimate for the current year to between 7.5 and 8 per cent.
As for inflation versus growth, one cannot but go back to Governor Subbarao's succinct observations in the annual policy statement.
Pointing out the damage that persistently high inflation would cause to the growth process and to investor sentiment, he had said: “An environment of price stability is a pre-condition for staining growth in the medium-term. Reining in inflation should, therefore, take precedence even if there are some short-term costs by way of lower growth.''
In the context of the forthcoming policy review, it seems clear.