The Reserve Bank of India (RBI)'s action today had been on expected lines. Guidance for near-term policy moves remains mixed, emphasising growth concerns and softer core inflation but at the same time citing retail inflation and inflation expectations as meaningful risks. On balance, RBI seems to be following its usual style of staying cautious and trying to contain expectations, while delivering easing.
While the concerns on retail inflation and inflation expectations are well-founded, I would, nevertheless, expect upcoming macro data - inflation and growth, in particular - to eventually lead to further monetary easing in the coming months.
RBI turns a lot more explicit in acknowledging growth risks, as GDP growth recently hit a 15-quarter low of 4.5 per cent, with usually resilient segments such as consumption and services exhibiting meaningful weakness. The recent trend of fiscal austerity also remains a key negative for near-term growth recovery. Importantly, on the other hand, March 2013 inflation will likely be lower than RBI's projection of 6.8 per cent flagged just six weeks earlier. Core inflation has fallen to 3.8 per cent from over eight per cent about a year earlier. In fact, I expect core inflation to settle near three per cent in H2 2013, reflecting continued weakness in economic activity.
Retail inflation remains high. This is a clear obstacle to rein in inflation expectations. But, given high food inflation currently plays a major role to keep the CPI high, the role of supply-boosting measures, rather than containing demand, becomes important, as has been rightly pointed out by RBI. The role of governments and administrative policies should be important in this regard. Thus, while high retail inflation will likely remain a concern, it should not derail monetary easing in the coming months as growth concerns will likely remain overpowering.
Monetary policy needs to be forward looking - on balance, I would expect another 50 bp repo rate cut by mid-2013, apart from liquidity support from RBI. It is true structural inflationary pressures and inflation expectations have gone up considerably of late, reducing the legroom for monetary easing in the current cycle. Nevertheless, repo rate at seven per cent (by mid-2013) should not be perceived as overtly accommodative either, especially when growth is touching new lows.
Siddhartha Sanyal
Chief India Economist, Barclays
