The outcome of
RBI’s sixth and final bimonthly monetary policy statement for the FY 2019-20 is
unsurprising. Repo has been retained at 5.15% and therefore the other rates
like MSF, reverse repo, bank rate etc. too remain unchanged. RBI projects a
growth of 6% something in alignment with what the budget has projected. They
anticipate higher uncertainty in inflation. The question however, is given the
macroeconomic dynamics at the current instant, could RBI stance been bolder or
was it cautious reiteration of its mandate.
As one delves in
to the RBI monetary policy statement (available
here)
some interesting pointers emerge. Global headwinds continue to impact the
Indian economy too. There is no respite for European economies like France and
Italy on the continued downward growth trend. Britain will have to confront
with post Brexit uncertainties. US Iran tensions may have eased down
momentarily but the impact might take a time to ease out, US-China trade wars
demonstrate ebbs and tides creating ambiguity. The emergence of coronavirus in
China has virtually led to a shutdown in industrial, manufacturing, retail and
services activity in large parts of China. There is no consensus yet among the
experts on the likely impact of viral epidemic on the economic activity both in
China and abroad. Therefore, given the global headwinds and the possible protraction
of the same into the instantaneous future, Indian economy would have been well
served by a booster dose.
In RBI’s own valuation,
domestic economy apparently is on the cusp of a turnaround. Clarity, however,
eludes on the durability or otherwise of the turnaround. Undeniably, Nov and
Dec 2019 saw continued contraction of production and import of capital goods.
Investment therefore is expected to remain sluggish for some more time. The current growth needed a counter-cyclical
measure which is invariably comes from increase in revenue expenditure of the
government. The budget estimates and revised estimates confirm the same.
Yet the
agricultural activity seems to be picking up. Despite some shortfall on kharif,
rabi has shown an increase. With normal to above normal south-east monsoon
rainfall, reservoirs are around 70% of total storage up from around 45% last
year. Barring onions, food production seems to be normal. India’s trend in
movement towards horticultural production seems undisputed. Onion prices rising
are resulting in upward movement of nearly three times of the food inflation. A
detailed analysis on food inflation and the solutions is discussed
here.
Excluding onion prices, food inflation would have been down by 4.7% points. So
onions have virtually skewed the food inflation basket which skews the headline
CPI basket. Implied is a monetary policy centred on inflation targeting held
hostage by one single vegetable-onion! The outcome is therefore reduced to addressing
imbalances in onion supply-demand dynamics rather than overall assessment of
the directions of economic growth and activity.
Capacity
utilization which was dipping continuously into Q2 2019-20 might see a reversal
in fortunes. Core industries are in the black after a couple of quarters of
red. PMI is hitting a seven year high in manufacturing in Jan 2020. Similarly
services PMI too experiences eight year high in Jan 2020. Therefore they good
lead indicators of what portends for the economy in the near future. One must
be cautious in reading and interpreting these lead indicators. They are mere
pointers and not conclusive objects of economic growth. Both rail freight
traffic and port activity manifest acceleration though motorcycle sales, a good
indicator for rural and semi-urban activity still shows signs of contraction.
Air traffic continues to increase thanks to expansion of UDAN.
In RBI’s
assessment, headline inflation would have remained in 4-5% zone but for onion
prices. Core CPI and core WPI both continue to remain weak though fuel
inflation seems to show some positive signs. Fuel inflation remains low and was
in negative for some time despite political tensions in the Persian Gulf. Fuel
prices are unlikely to pick up given the anticipated economic slack in China.
Core CPI too rose only because of the rise in mobile phone charges and
transportation charges. Given the stickiness in these prices, there is unlikely
to be an upward movement for months of Jan or Feb 2020. The core inflation
might unsurprisingly fall a bit in the last quarter of FY 2019-20.
Household
inflation expectations have eased, the business confidence levels have
increased, while non-essential household expenditure continues to decrease,
overall consumption spending is likely to exhibit an uptick. RBI foresees
surplus liquidity conditions. Interestingly demand for loanable funds seems to
lag being the supply of loanable funds despite southward direction of effective
interest rates. RBI suggests 87 bps reduction in vehicle loan rates and around
40 bps reduction in housing loans measured as Weighted Average Lending Rate
(WALR). RBI feels there is a sizeable monetary transmission across various
money market segments and private corporate bond market.
FDI continues to
increase, however, a point of concern persists over a continual decline in
exports accompanied by a slump in imports too. Gold imports have declined.
There is small shift in momentum towards assembly of consumer electronics and
durables in India, a sort of boost for Make in India. RBI anticipates softening
of the food inflation despite a couple of adverse conditions in milk and kharif
crops segments. They anticipate some volatility in oil prices, a bit of greater
uncertainty injected thanks to China coronavirus. RBI points towards a rising
input prices yet competitive nature of the industry coupled with weak demand
conditions might result in firms absorbing these increments in input costs. They
presume a rise in consumer spending following the changes in the income tax
rates in the Union Budget. This might be optimistic given there are certain
uncertainties in the slabs and clarity might be while coming on the income tax
slab and exemption front.
The output gaps
continues to be in negative zone. Despite high frequency indicators pointing
towards positive signals, RBI feels caution is advised over the sustenance of
the indicators. What perhaps the economy needs is strong signal from the
government and RBI over their intentions to clear the pathways for rekindling
of animal spirits. The budget was disappointing the in macro-signals it was
supposed to send. RBI too could have
been bold and gone with at least a symbolic cut of 15bps bringing the repo to
5%. At the very least it could have sent a signal of detachment of onion
economics from the rest of economic activity. Perceptibly while RBI’s decision seems
a visible relief in not hiking the rates yet apparently an opportunity missed
given the projected turnaround to reduce the rates. This one single act would
have imparted fresh animal spirits rekindling the northward direction in the
Indian economy.
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