EXPECTING RATE CUTS? DON'T!

By Research Desk
about 10 years ago

 

By Ruma Dubey

The inflation numbers were most certainly a cause for cheer. The Wholesale Price Index (WPI) which came in today afternoon for the month of September’14 was at a 5-year low at 2.38% v/s 3.74% in August.

And yesterday, the Consumer Price Index (CPI) was also a reason for celebration. For Sept’14, it came in at 6.46% v/s 7.8% in August. A sharp fall in prices of vegetables surely helped. But in both the cases what we need to remember is the higher base effect where prices were perennially high.

Yesterday, post the CPI numbers there was talk in the market that RBI Governor, Raghuram Rajan will now reduce interest rates; after all he also needs to do his bit? Then after the numbers today morning, the talk is that Rajan WILL HAVE TO reduce rates. There is now no question of whether he will do it or not- the market has concluded that he will have no alternative but to reduce rates.

There are various analysts across the media who have said that the pressure is now building on Rajan after these rates as growth is hurting. Many even said that the Modi govt will make it very clear to Rajan that he needs to reduce rates to propel growth.

Well, in a nutshell, all that talk is pure hogwash. On 3rd June’14 when Rajan had presented the Credit Policy, he had very clearly stated then itself that inflation will cool off in the coming months. 

“It is critical to look through any transient effects, including these base effects, which could temporarily soften headline inflation during 2014,”  These were the precise words of RBI Governor, Raghuram Rajan when he had last presented the Credit Policy in June. He knew, seasonally, there would be a fall in prices and that the fall would look all the more pronounced because of the higher base effect. Yet, he had warned that despite these factors, one would need to look beyond these short term occurrences.

The Governor has stated that “RBI remains committed to keeping the economy on a disinflationary course, taking CPI inflation to 8% by January 2015 and 6%by J anuary 2016. If the economy stays on this course, further policy tightening will not be warranted. On the other hand, if disinflation, adjusting for base effects, is faster than currently anticipated, it will provide headroom for an easing of the policy stance”. But this is indeed the right stance – being dovish. Otherwise it would have been too premature; RBI also needs to wait and watch how the Govt moves on reforms and economic growth. Frankly, if the Govt does its job well and RBI does its job as it is doing, there is really no need for either to interfere with each other. As the RBI has always said, even Rajan’s predecessor, Subbarao said that easing of domestic supply bottlenecks and progress in the implementation of stalled projects should brighten the outlook for both manufacturing and services. And that is what the Govt needs to work on with urgency.

Thus Rajan has already spelt out what he will do. Expecting any rate cut in the immediate future is too early; we will have to wait for more data. This low inflation is seasonal and we could see one more month of low rates. That really does not mean much. What we need to see is rates remaining low even after October and if that consistency is maintained for two months or so, only then can we expect a rate cut.

So instead of getting excited about rate cuts, enjoy the lower prices, eat more vegetables and go for long drives as fuel price is also expected to come down. Enjoy the good things while they last.

The fifth bi-monthly monetary policy statement is scheduled on Tuesday, December 2, 2014.

 

 

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