Of monetary chutzpah and endurance

By: | Published: August 5, 2015 12:21 AM

After the ‘front-loaded’ cut in June, the Reserve Bank of India maintained status quo at its bimonthly policy review in August. A great deal has transpired between these two policy reviews.

After the ‘front-loaded’ cut in June, the Reserve Bank of India maintained status quo at its bimonthly policy review in August. A great deal has transpired between these two policy reviews.

On the global front, the Greek debt crisis nearly came to the brink of explosion, which, eventually, got averted as political gumption joined hands with economic reality.

Meanwhile, China is showing perceptible jitteriness with signs of cooling in its real estate market, excess capacity in the economy, and skittish equity markets. The combination of concerns over China and a relatively bullish outlook on the dollar once again precipitated a sizeable correction in global commodity prices.

On the domestic front, while developments were comparatively less volatile, they were far from providing complete assurance to the central bank. First, retail inflation for the month of June surprised on the upside. There was evidence of generalised increase in sequential momentum for both food and core inflation as past impact of weather disturbances and a hike in service tax rate permeated through prices.

Second, supply side reforms have not gained the desired pace of traction. Amid ongoing political disruptions, the monsoon session of Parliament has not yet been able to push through critical bills on land acquisition and GST. Third, monetary policy transmission remains incomplete with median base lending rates of banks falling by only 30 bps in response to RBI’s 75 bps cut in the repo rate so far.

While global uncertainty has ebbed somewhat, lack of any concrete evidence on domestic factors under consideration over the last two months prompted the central bank to stick to its earlier guidance on “conditions” evolving favorably for further monetary accommodation

So how have these “conditions” evolved? Here lies some good news.

First, the south-west monsoon season, the onset of which was initially delayed was expected to post a sub-normal outturn. However, its progress so far has been satisfactory with rainfall deficiency remaining mild at 6%, vis-à-vis the anticipation of 12% earlier. This near-normal progress has helped to improve kharif sowing so far.

The upcoming kharif season will also face sub-5% increase in minimum support prices for third consecutive year, thereby limiting structural price pressures.

Moreover, the government machinery appears to be functioning efficiently in the area of importing food articles (like pulses and onions) that are showing signs of a buildup in price pressure and staging preparedness for other contingency measures like buffer stock liquidation, use of Price Stabilization Fund, action against hoarding, etc. These measures are expected to curb any runaway increase in food inflation.

Second, the government has made targeted effort towards infusing capital into public sector banks. Third, with Iran likely to contribute towards the existing oil supply glut, softness in crude oil prices is likely to persist in the near to medium term. Fourth, the existing surplus liquidity in money markets will induce banks to hasten monetary policy transmission.

In my opinion, these factors will help create enabling conditions and provide comfort to the RBI for considering an incremental 25 bps of monetary easing in H2 FY16. In the meanwhile, it’s important to keep popular pressure for easing at bay while waiting for an appropriate time for the policy action.

The writer is Chief Economist at YES Bank

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