By cutting the policy repo rate by 25 basis points , the Reserve Bank of India has opted to play safe while nominally acceding to the clamour for softer lending rates. The Monetary Policy Committee’s majority decision (one member voted to keep rates unchanged, while another wanted a deeper cut) hinged on its observation that some “upside risks to inflation have either reduced or not materialised”, opening up “some space” for accommodation. Specifically, the bimonthly policy statement refers to the significant slowdown over the past three months in core inflation — retail price gains excluding those for food and fuel. It notes that the monsoon has so far been normal, and the initial roll-out of GST has been “smooth”. Yet, the six-member panel has chosen to retain the “neutral” stance, given that it expects the trajectory of inflation to rise from current lows amid a welter of uncertainties. The factors deterring a more abidingly benign view for the path that prices are likely to traverse bear repeating, given the inflation-targeting remit handed to the MPC: the RBI’s statement does just that. A conclusive separation of “transitory and structural factors” impacting price gains remains elusive. Prices of inflation-sensitive tomatoes and onions are spiking. Pressures may be building that could spur higher animal protein costs for consumers. The implementation of farm loan waivers by States and the “tail risk” that the fiscally expansive measures could pose to long-term price stability that RBI Deputy Governor Viral Acharya referred to in June, continue to be germane. And there is no clarity on whether and when State governments will implement salary and allowance increases following the Centre’s implementation of the seventh pay panel-related hikes.
The MPC acknowledges there are moderating forces at work — a second successive normal monsoon that could check food costs and a stable international commodity price outlook — that could help keep the inflation trajectory favourable. On economic activity, the RBI has flagged multiple concerns. A poll of business sentiment in the manufacturing sector shows respondents expect a moderation in July-September from the preceding quarter. Also, the high levels of stress that continue to be reflected in the balance sheets of both lenders and corporate borrowers presage the unlikelihood of any uptick in new investment. With the underlying impulses for growth in industry and services weakening, the onus is now on the Centre and the States to take enabling steps, through policy measures and directed fiscal actions, to give a thrust for the revival of private investment. Surely, as Mr. Acharya cautioned in June, it will serve nobody’s interests if the rate reduction doesn’t have “the desired amplifier effects on the economy” and ends up only temporarily masking the true problems in the banking and real sectors.
