Reading the tea leaves

Unlike on September 29, when the Reserve Bank of India slashed the overnight repo rate by 50 basis points to 6.75 per cent, there were no surprises this time round. A status quo on rates seemed the natural course of action amidst such extraordinary global turmoil. The monetary policy review is distinctly apprehensive in tone, both on the prospects of the global and the domestic economy. Some global worries have been identified — turmoil over China, lukewarm impact of quantitative easing in Japan and impact of rock-bottom oil prices — but others, such as the impact of oil exporters like Saudi Arabia selling US treasuries to finance its deficit, have not. Unless this is offset by an inflow of dollars from other quarters, a compression of the RBI’s balance sheet and profits as a result of a fall in the value of US bonds cannot be ruled out. This can have liquidity repercussions for India. A shift from dollars to gold should be carried out to offset some of these risks. While the rupee has by and large been stable, a drop in remittances from West Asia could strain the currency (besides bouts of volatility), as would a rising trade deficit if the December trend of imports falling less than exports continues. There’s no mistaking the review’s gloomy take on the domestic economy — on both the inflation and growth fronts. It sounds more concerned about food price inflation than last time round, in view of the indifferent northeast monsoon, and expects the Seventh Pay Commission award to have an inflationary effect. As for industry, it says that “stalled projects continue to remain high and there is a decline in new investment intentions”, discounting the recent rise in the purchasing managers’ index. A projected growth of 7.6 per cent for the next fiscal seems like an act of political correctness.

The RBI’s analysis, while being remarkably candid, is not without its curious omissions. A cogent explanation of the gap between wholesale and retail price indices, even though that has narrowed of late, was called for. This issue has even drawn the concern of the Chief Economic Advisor and the Chief Statistician. As it justifies inflation-targeting, the RBI should consider going beyond just retail prices. The review retains a subtle bias towards accommodation, which reflects a sense of confidence in fundamentals as well as worries over growth. The RBI should never cease to remind itself that food prices are best addressed by easing supply side bottlenecks.

The economy is in a mood of waiting — waiting for the global storm to clear, for domestic banks and the private sector to clean up their balance sheets so that a new round of investment can begin, and for good monsoon in 2016 after two bad agriculture years. The Budget should take a pragmatic rather than rigid view of fiscal consolidation in such a situation — combining a prudent public spending push with bold reform measures that add to investor confidence in these difficult times.

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