No interest respite

The Reserve Bank of India, as widely predicted, has not cut benchmark interest rates in its latest monetary policy review. This, despite wholesale inflation falling to a 58-month low of 3.7 per cent in August, retail inflation ruling below RBI’s January 2015 target of 8 per cent and (based on the new consumer price index series) actually at its lowest level after excluding food and fuel, and the Indian crude basket easing by around $15 a barrel to $95 levels over the last three months. In addition to these, we have a more-or-less stable rupee (notwithstanding the dollar’s strengthening against all currencies on expectations of the US Federal Reserve raising interest rates early next year) and downward pressure on non-food prices from an unrelenting domestic slowdown, or a “negative output gap” as the RBI calls it.

Given the clear moderating trend in inflation, what has prompted the RBI to keep its key policy rates unchanged? Well, this time around, it has mentioned “risks from food price shocks” as the full effects of a not-so-good monsoon unfold to “impart some uncertainty to an otherwise improving inflation outlook”. True, we have had a 12 per cent deficiency in the monsoon this time.Also, the rainfall distribution has been both spatially and temporally skewed. But the fact is that wholesale food inflation has dipped from 9.6 to 5.2 per cent between May and August. Also, the worst fears of a complete monsoon failure/drought and an El Nino that seemed imminent until early July haven’t materialised. Besides, the RBI has not adequately factored in international price movements in most agri-commodities — from wheat, corn and soyabean to palm oil, sugar, cotton and milk powder — which have registered sharp declines in the last one year. The weak global price outlook for commodities, extending now to crude oil and gas as well, ought to provide reasonable insulation against any renewed food inflationary pressures back home.

But these obvious trends are unlikely to make any difference to the RBI, which is now firmly focused on achieving its next target of 6 per cent retail inflation. There will probably be no reduction in interest rates until consumer inflation is brought down to that level. Such a stance isn’t good for an economy battling a more than three-year-old slowdown and bereft of either monetary or fiscal stimulus instruments to support a recovery. This would only prolong the agony for job-seekers, without any guarantee that high interest rates will rein in prices of essentials. Our policymakers erred in 2008-09 by resorting to excessive fiscal as well as monetary loosening. They are again repeating this error by doing the opposite — of simultaneously tightening both fiscal and monetary policy in a slowdown. We would be better off, instead, with the Centre staying the course on fiscal consolidation and less rigidity on the RBI’s part when it comes to interest rates.

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