Goldman Sachs had the right question for Wednesday’s coordinated move by central banks to ease dollar funding for banks: “Why act now—is there something lurking around the corner?”
The reasons for China’s cut in the bank cash reserve ratio (CRR) is, on the other hand, very clear: the HSBC China Manufacturing Purchasing Managers’ Index (PMI) for November fell to a 32-month low of 47.7 (a reading below 50 signifies contraction from the preceding month). Inflation in China is coming off and the PMI survey said, “The rate of output price discounting was marked, and the sharpest in 32 months.” The policy focus has shifted from containing inflation to supporting growth.
The PMI surveys for November continue to show global weakness, although US manufacturing is expected to have improved. The UK Manufacturing PMI was near a two-and-a-half-year low, while the Markit Eurozone Manufacturing PMI was at a 28-month low. In India, PMI is still in expansionary territory at 51, but only just.
In the circumstances, the next step should be a rate cut by the European Central Bank. Ultimately, however, it is the euro zone politicians who have to come up with a workable fiscal deal.
Should the Reserve Bank of India (RBI) follow the People’s Bank of China’s example and reduce CRR? After all, liquidity is tight and likely to get tighter. Won’t open market operations (OMO) do the trick? A. Prasanna, chief economist at ICICI Securities Ltd, says the problem is the central bank can’t be certain of how OMO will be received, and liquidity is low in many government securities, so selling them is not easy. He believes the CRR move will probably occur once headline inflation reduces further.
The good news is the Wholesale Price Index for primary articles has been steadily falling. Also, the auction of an enhanced debt limit for foreign institutional investors was eminently successful, bringing down bond yields. But the HSBC India Manufacturing PMI for November had the output price index at 55.4, around the same level as in the previous two months, indicating that manufactured prices are still rising month-on-month. Headline inflation is far above RBI’s comfort level. The ballooning fiscal deficit is yet another reason for RBI to be wary. The central bank has taken its foot off the brake, but it cannot afford to press the accelerator.
Also See | Weakening pace (PDF)
PDF by Yogesh Kumar/Mint