FE Editorial : Here come the rate cuts
Apart from the fact that inflation levels are now within RBI’s comfort limits, the WPI data show how all-pervasive the industrial slowdown is. WPI inflation for basic metals and metal products, down to 3.37% in December was 9.75% as recently as July; WPI inflation for irons and semis was near flat at 0.96% in December as compared to 12.03% in July. The same lack of demand can be seen in the fact that deposits growth in banks in the fortnight ended December 28 grew at 11.1%, a lower growth than that seen in many years. Exports, similarly, continued to fall for the 8th straight month, though the rate of fall seems to have slowed—December exports fell just 1.9% yoy compared to a fall of 4.2% in November.
Whether RBI chooses to go in for a rate cut—and 25 bps or 50 bps—will depend on whether it chooses to be consistent or not. Though RBI’s stated policy variable has been the modified core inflation, in recent monetary policy statements RBI has confounded all watchers by changing its goalposts from WPI to core inflation to CPI and even, in the August statement, to the output gap.
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