The Reserve Bank of India has a dilemma. The market expects it to cut rates this week but the macroeconomic situation could suggest otherwise. Many want a stimulatory rate cut because, as Table 1 shows, growth has collapsed. In less than two years, it has almost halved, to 4.5 per cent year-on-year last quarter. Much of that is due to anaemic industrial production; Table 2 shows industrial growth has oscillated around zero for the past year. Perhaps the most worrying macroeconomic indicator is the balance of payments; as Table 3 shows, the current account deficit as a proportion of gross domestic product is alarmingly high.
Should RBI still be worried about inflation? As Table 4 shows, the retail inflation rate is still comfortably in double digits. But that is pushed by high food prices - primary-goods inflation - while "core" inflation for manufactured articles is now close to RBI's comfort zone, at 4.5 per cent. RBI will also be watching the liquidity situation, shown in Table 5. This time of the year, liquidity is usually tight, as tax payments by companies come due.
The real question, however, is what good a rate cut would do? Is monetary transmission working? (Click here for tables)
As Table 6 shows, credit growth has, in any case, been consistently above deposit growth, which is unsustainable, especially if returns to depositors fall further after a rate cut. Partly, this is pushed by extremely high growth in cheap agricultural credit (and the arbitrage profit entailed), shown in Table 7. But the government's high borrowing, shown in Table 8 - already 90 per cent of the previous year's borrowing, in the first three quarters of this financial year - could really be what's crowding out investment, not high rates.
Should RBI still be worried about inflation? As Table 4 shows, the retail inflation rate is still comfortably in double digits. But that is pushed by high food prices - primary-goods inflation - while "core" inflation for manufactured articles is now close to RBI's comfort zone, at 4.5 per cent. RBI will also be watching the liquidity situation, shown in Table 5. This time of the year, liquidity is usually tight, as tax payments by companies come due.
The real question, however, is what good a rate cut would do? Is monetary transmission working? (Click here for tables)
As Table 6 shows, credit growth has, in any case, been consistently above deposit growth, which is unsustainable, especially if returns to depositors fall further after a rate cut. Partly, this is pushed by extremely high growth in cheap agricultural credit (and the arbitrage profit entailed), shown in Table 7. But the government's high borrowing, shown in Table 8 - already 90 per cent of the previous year's borrowing, in the first three quarters of this financial year - could really be what's crowding out investment, not high rates.