RBI will likely wait again

The bounce-back of industrial production in October to a one-and-a-half year high of 8.2 per cent may spark talk of revival. But given the swings that the Index of Industrial Production (IIP) has undergone over the past two years, no one is willing to bet on it yet.

Even the Finance Minister chose to be cautious, arguing in a tone that would make the Opposition proud: ‘one swallow does not a summer make’! No doubt the low base effect helped, because the same month last year saw a contraction in output.

Festival-related buying

Economists say that some part of the pick-up was also due to the festival-related buying that marks the onset of the busy season at the beginning of the third quarter. They don’t expect the pick-up to sustain for the next couple of months, and view this more as an aberration.

GDP growth forecasts are still in the 5 per cent range and are unlikely to materially change based on just the October IIP number. If anything, a dip is expected when the next month’s IIP numbers come in. Both the global and domestic investment climate has been weak.

Besides, inflation hasn’t shown any sign of coming down. Although the wholesale price index number came in lower than expectations at 7.2 per cent, it still is much higher than the RBI’s own comfort level. The November consumer price index level moved up to 9.9 per cent. The spike in inflation rate has been on expected lines.

Even at the time of half-yearly review of monetary policy in October, RBI Governor D. Subbarao, had mentioned that he did not expect inflation to start easing till the fourth quarter of the fiscal. He had kept his options of acting on the rate front in January if there were other helpful factors.

There is some expectation that the RBI will once again tweak the cash reserve ratio to cater to the concerns on tightening liquidity. The CRR was reduced by 25 basis points from 4.5 per cent to 4.25 per cent with effect from November 3. At that time, the RBI had made it clear that the reduction was being done to pre-empt a prospective tightening of liquidity conditions.

Currently liquidity conditions seem comfortable as reflected in money market rates and repo borrowings.

Based on the above, it doesn’t seem the RBI is going to be in a mood to cut interest rates at its mid-quarter monetary policy review on December 18. Perhaps it may be too soon even in January when the quarterly review comes up. It is quite likely the RBI would wait till March before bringing rates down.

By that time, the Budget would have been presented and a clearer picture on fiscal consolidation would emerge. Until then the RBI will probably hold its hand and only dish out the bitter medicine that the Finance Minister himself has been saying that the country has to take.

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