Cut to grow

The historically low inflation print of 1.54 per cent for June has strengthened voices arguing for a rate cut by the Reserve Bank, and understandably so. Inflation is at a level not seen since 1999, in the words of Chief Economic Advisor Arvind Subramanian. And it is not just about a fall in food and vegetable prices. Core inflation, that is non-food and non-fuel, at 4.03 per cent, is well under control too. Subramanian believes that “a paradigm shift in the inflationary process to low levels of inflation” is now under way. It means that the trend of low inflation prints in the last few months is an enduring one and therefore the Monetary Policy Committee (MPC) has to take that into its calculus while framing the interest rate policy.

At its last meeting in June, the MPC pointed out the many risks that could reverse the downward trend in inflation. The effect of the house rent allowance payments to government employees as per the 7th Pay Commission award, the possibility of fiscal slippages due to farm loan waivers by some States, the effect that GST will have on prices, and global uncertainties were offered as reasons for maintaining status quo on rates. To be sure, these factors continue to stay relevant even now. Yet, these should not be held up as reasons for not cutting rates as a rise from here on will still keep the overall inflation print within the MPC’s band. Projections by SBI show that consumer price inflation will remain under 2 per cent in July and despite rising thereafter will average at 3.5 per cent for the current fiscal, with a downward bias. Most economists seem to believe that inflationary expectations have decisively changed in favour of a low price rise regime.

The industrial output data for May, with just a 1.7 per cent rise, clearly shows that the growth impulse in the economy is ebbing. Manufacturing growth decelerated to 1.2 per cent while capital goods output declined by 3.9 per cent, which is worrying indeed. Of course, some of this could be attributed to GST and the strategy of manufacturers to slow down output to push out stocks before the deadline. Yet, data since demonetisation would show that manufacturing has been consistently under pressure and desperately needs a leg up. The RBI has probably tied itself up with its shift to a neutral stance from an accommodative one in its policy review in February. Six months down the line, the conditions have changed and so have the data. It’s time the central bank changes its stance once again and delivers what industry, government and markets have been clamouring for — a growth-stimulating rate cut.

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