Business
Which way will Rajan go with rates post-budget? (News Analysis)
By
By Biswajit Choudhury Mumbai, Feb 21
With economic data before the
union budget on Feb 28 showing inflation at a five-year low, Reserve
Bank of India Governor Raghuram Rajan can perhaps indulge in a belated
celebration of his birthday that fell Feb 3 when he maintained the RBI
repo rate at which it lends to commercial banks at 7.75 percent.
Rajan
told the media that day : "Monetary policy is a long-term process. You
can't hold me every 15 days saying when are you cutting rates? We have a
budget coming up. Inflation data also is yet to come."
After a gap of nearly two years, he had last cut the repo rate on Jan 15.
He is currently said to be wrestling with the changes in the mode of computing the latest set of economic data.
Data
earlier this week showed that wholesale price-index (WPI) inflation
decelerated by 0.39 percent in January from an increase of 5.11 percent
in the same month of last year. The WPI-based inflation had fallen to
0.11 percent last December.
However, the deceleration in
wholesale inflation comes on the back of retail inflation gaining
momentum. The consumer price index (CPI)-based inflation in January
stood at 5.11 percent month-on-month.
The December retail
inflation, recalculated with the new base year, was at 4.28 percent. It
was at 5 percent with 2010 as the base year.
Government
statisticians, however, had a bigger surprise in calculating the GDP
with a new base year, which makes it harder for Finance Minister Arun
Jaitley to assess the size of the fiscal stimulus required to help
restore the economy.
Shifting the base year from 2004-05 to
2011-12, the Central Statistical Office last week estimated GDP growth
during 2014-15 at 7.4 percent as compared to 6.9 percent in 2013-14. It
has also revised the growth rate for the first half of 2014-15 to 7.4
percent from the 5.5 percent it had earlier reported under the old
method.
Commenting on data procedures Rajan said last month: "We
may be reaching the outskirts of the woods but we are not out of the
woods yet. So I don't think any data that suggests we are out of the
woods at this point, we would put too much weight on it."
He said
attaining the projected inflation target of six percent by January 2016
is at risk due to expected "food price shocks as the full effects of
the monsoon's passage unfold and from geo-political developments (oil
prices) that could materialise rapidly."
He also turned the focus on the forthcoming budget when asked about the lack of a forward guidance in the policy review.
"The
guidance remains what it was when we cut rates. Further action will
depend on developments on the fiscal front and on the disinflationary
process," Rajan told reporters here.
With the 2015-16 budget
widely expected to boost capital spending and offer tax breaks to the
manufacturing sector, Jaitley has a headache in controlling the fiscal
deficit because the tax revenue earned by the central government as a
percentage of the GDP has been falling over the years.
Tax
revenue in 2007-2008 stood at 11.9 percent of the GDP. By 2013-2014, it
had fallen to 10 percent of GDP and in 2014-2015 is expected to fall
further to 9.6 percent, signifying the government's declining ability
to service its accumulated debt.
Then, there is the recent
history of many big nations like China, Russia and Brazil which tried
full-throttle experiments in stimulus spending - and failed.
Given
that Rajan is against reversing the direction he set by cutting rates
in January, is he going to cut further post the budget is the question
analysts are puzzled about.
Here, it is instructive to consider
that less than six months ago, Rajan, who in 2005 had predicted the 2008
financial meltdown that is still affecting global economy, felt
stronger in his belief that global markets now are at the risk of a
crash due to the competitive loose monetary policies being adopted by
developed economies. He has been warning that emerging markets are
especially vulnerable to big shifts in capital flows triggered by the
unprecedented monetary accommodation in rich countries.
Pointing
out how all kinds of ways of infusing liquidity has created markets that
tend to push asset prices probably significantly beyond fundamentals,
thereby making markets much more vulnerable, Rajan has said he is more
worried that altering the price of capital over an extended time span
would result in distorting investment decisions and changing the nature
of the economy itself.
(Biswajit Choudhury can be reached at [email protected])