Does the Reserve Bank of India face a changed situation, allowing it to cut rates in the coming fortnight? Overall growth remains anaemic, though the precipitous slide visible in Table 1 appears to have been arrested. The index of industrial production for manufacturing – visible in Table 2 – was positive in August, too – though there is little doubt, looking at the graph’s overall shape, that the trend is downward. That the manufacturing outlook continues to be gloomy, requiring intervention to boost investment, is visible also in the steady downward trend of HSBC’s purchasing managers’ index for manufacturing, graphed in Table 3.
The RBI will point out that consumer inflation, visible in Table 4, continues to be high, at over 10 per cent. Food inflation (the wholesale price index for primary articles) continues to be high, though has dipped slightly after fears of drought proved unfounded. Yet, again, it is clear that there is much lower inflation in manufacturing, indicating that, once again, inflation is being driven by food and fuel and there is much excess capacity within the productive sector that needs monetary stimulus.
Where the RBI does have a point is that fiscal discipline doesn’t seem to have kicked in sufficiently. Gross borrowings have been very high for all the past three financial years – shown in Table 5 – but the figure for just the first half of 2012-13 suggests that this year could be higher still. This keeps rates high, with investors going for government bonds.(Click here for tables)
As Table 6 reveals, yields on 10-year government securities are still above 8 per cent, which means a rate cut will not pass through easily into cheaper capital for companies. Note that liquidity, as shown in Table 7, is not the problem it was earlier this year.