The time to act was now

This time, the Reserve Bank of India did what many analysts expected and kept policy rates on hold. Cash reserve ratio (CRR) remained unchanged at 4.25 per cent and the policy Repo rate under the liquidity adjustment facility (LAF) was retained at 8.0 per cent.

True to form, the central bank has stuck to its guidance given in October and has prepared the ground for a rate cut starting in January 2013. So while the shift in policy stance is clear, in my view there was perhaps a case for acting now, rather than later.

Time is of the essence and the growth slowdown which began in mid-2011 needs to be reversed fast while nurturing the green shoots of recovery.

Reversing the slowdown

The leading indicators give room for optimism: manufacturing PMI is at a five-month high, the RBI’s Business Confidence Index is rising, corporate profitability is buoyant and manufacturing posted a positive number at 9.6 per cent in October’12, after remaining negative in four out of the last seven months and against minus 6.0 per cent in October ’11.

Coal production came in at a double-digit 21.4 per cent in September, electricity generation rose 4.8 per cent during April-October’12, and CMIE expects this to grow by 10.7 per cent in the second half of FY13.

Capacity utilisation in steel is at around 90 per cent and freight traffic grew 8.2 per cent in September ’12 against minus 1.8 per cent in September 11. Rabi agriculture is expected to give a push to production in the agricultural sector.

So growth in H2 of FY13 is likely to be higher than the 5.4 per cent seen in H1 of FY12, leading to visible traction in growth. And this fragile growth needs careful nurturing.

Positive message

The Government’s reform measures have improved sentiment, signalling its resolve to get growth back to a higher growth trajectory. The National Investment Board, attempts to ease the land acquisition process, efforts to improve access to external borrowing, efforts to pass the pending financial Bills — all send out a very positive message which will help investment and attract foreign capital.

A rate cut would reinforce these efforts and signal that reforms, fiscal policy and monetary policy are moving in tandem.

The inflation trajectory is also heading lower. WPI inflation edged down to 7.24 per cent in November ’12 on the back of softening in prices of vegetables, minerals and fuel as well as moderating global commodity prices.

Core inflation has also eased, following decline in prices of metals, cement and chemicals. However, the firming in prices of protein-based items as well as increase in CPI inflation to 9.90 per cent in November ’12 from 9.75 per cent in October ’12 has perhaps prompted the RBI to pause for now.

Other macro parameters are also on more firm ground.

The fiscal deficit is likely to be contained at or close to 5.3 per cent on the back of sound tax collections, disinvestment income and expenditure control.

Moderating crude and commodity prices as well as lower gold imports will help control the current account deficit.

The likely resolution of the US fiscal cliff would be another positive.

Against this backdrop, perhaps the stage is now set for more than one rate cut, going forward.

(The author is Head, Economic Research, State Bank of India)

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