Macro Economy

Rajan may wait for inflation, fiscal deficit cues in Feb

Beena Parmar Mumbai | Updated on January 27, 2014 Published on January 27, 2014

Also, industrial production, services sector have contracted





Despite a decline in inflation, tepid growth and a weakening rupee may see the RBI keep key policy rates unchanged in the third quarter review of the monetary policy on Tuesday.

“Though inflation has lowered, I do not see any change in policy as the real sector indicators like the IIP (index of industrial production) data and the services sector have seen sharper contraction,” said Rupa Rege Nitsure, Chief Economist at Bank of Baroda.

Industrial output

India’s industrial output hit a seven-month low of -2.1 per cent in November, primarily due to sharp decline in manufacturing sector and consumer durables.

In the previous monetary policy in December too, citing inflation above comfort level, the central bank had kept the policy repo rate unchanged at 7.75 per cent and cash reserve ratio (CRR) at 4 per cent of net demand and time liability.

RBI Governor Raghuram Rajan had then stated that high inflation at both wholesale and retail levels risks entrenching inflation expectations at unacceptably elevated levels, posing a threat to growth and financial stability.

The December retail inflation declined to 9.87 per cent. In addition, the wholesale inflation fell equally sharply — from 7.52 per cent to 6.16 per cent, a five-month low.

A week ago, a committee headed by Deputy Governor Urjit Patel recommended a radical shift in the way monetary policy is crafted. The committee said the RBI must focus on bringing consumer price inflation down in the coming years.

Targeting inflation

The panel has suggested that the RBI should target retail inflation at 8 per cent over next 12 months and 6 per cent over the next 24 months.

This recommendation, if accepted, could see the RBI maintain a hawkish policy stance.

Ruling out an economic revival and increase in credit demand this year, Soumya Kanti Ghosh, Chief Economic Advisor at State Bank of India, said “We expect the RBI to pause in this policy and wait for further cues from data on inflation and fiscal deficit in February.”

Meanwhile, the US central bank is expected to cut back its stimulus by another $10 billion to $65 billion a month in its upcoming meet, which may further add to rupee's weakness.

Hence, Nitsure expects rate hikes going forward. “I feel full inflation trajectory critically depends on global crude oil prices and rupee depreciation. Hence, I do not rule out further rate hikes post this policy,” she said.

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Published on January 27, 2014
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