The RBI’s last policy communique hinted at a change in its monetary stance, as the underlying tone took a relatively dovish leaning. The unchanged repo rate at 8.0 per cent was vindicated by a balanced assessment of the growth-inflation outlook, which was primarily based on anticipation of appropriate policy actions by the new government. However, for the first time, the central bank hinted at the possibility of easing rates, if the CPI-based inflation trajectory surprised favorably vis-à-vis the expected disinflationary glide path towards 8 per cent by January 2015.
In the ensuing two months, the economic environment has pivoted the growth-inflation balance towards improvement. Encouragingly, the new government reaffirmed its commitment towards meeting a challenging fiscal deficit target of 4.1 per cent of GDP, while striving to revive investment-led growth through high impact albeit micro measures, instead of a sweeping big-bang approach. The near-term risks however continue to keep expectations of a quick and strong recovery at bay. Delayed and patchy monsoon performance, notwithstanding the recent encouraging progress in rains, bears upside risk to food inflation. Short-term and persistent efforts of the government such as open-market sale of wheat, crack-down on hoarders among others, may have helped limit some price pressures, if not annihilate them. The bigger concern emanates from the ongoing geo-political tensions that may keep energy prices vulnerable to upside risks.
Risks of resurgence in inflation momentum from short durational repercussions due to delayed monsoon and global crude prices therefore may prompt the central bank to maintain a cautious tone. In spite of the rise in momentum, the anticipated path of inflation softening is expected to remain intact owing to significant base effects over July – December 2014. Any reading of inflation print would therefore warrant stripping of base effects, here on. As such, the risk of a short term pick up in price momentum is expected to keep the RBI on “hold rates”mode. A rate cut will have to wait until the momentum and headline inflation both are in a sweet spot. Maybe the opportunity will present itself in January-March 2015!
The author is senior president & chief economist at YES Bank