Factory output grew 13.8% in July, significantly higher than consensus estimates. Apart from this, another set of data the Reserve Bank of India (RBI) will take into consideration before it announces the first mid-quarter review of monetary policy on Thursday is the wholesale price-based inflation. It rose 9.97% in July, ending a five-month streak of double-digit growth.
But that’s a provisional estimate and the final figure could be higher. Irrespective of the final inflation figure for July and the provisional estimate for August—both will be released early next week—it’s fairly certain that RBI will have to increase its policy rates once again.
Also Read Tamal Bandyopadhyay’s earlier columns
Bankers have been hoping that RBI will go soft on the rate front. In fact, nine of the 12 bank chiefs who participated in a Mint snap poll last week on the likely RBI action in the six-weekly review said they did not expect the central bank to increase rates. A few analysts and economists, too, shared the bankers’ view until the provisional industrial production data were released on Friday. Apart from weak manufacturing output expansion in June and declining inflation, a section of the analysts’ community had also cited increasing global uncertainties as a factor that should prompt RBI to press the pause button.
This theory got some credence after the Bank of Korea last week unexpectedly left its benchmark interest rate unchanged. Most economists had forecast a quarter percentage point increase in the interest rate. While keeping its seven-day repurchase or repo rate at 2.25%, Bank of Korea expressed concerns over global growth. Ahead of it, the central banks of Japan and Australia, too, had said they were worried about the strength of the global recovery amid rising US unemployment and the weak health of European banks. The Reserve Bank of Australia held its key interest rate at 4.5% and the Bank of Japan at 0.1%.
But the Indian context is different and RBI has no choice but to increase rates. In the current rate tightening cycle, the Indian central bank has raised its repurchase (repo) rate, or the rate at which it drains liquidity from the system, by 100 basis points (bps) to 5.75% and the reverse repo rate, or the rate at which it infuses liquidity, by 125 bps to 4.5%. One basis point is one-hundredth of a percentage point.
These rates are too low and the cost of money needs to go up. Manufacturing posted the strongest growth in July at 15% year-on-year against 5.8% in June and one look at the components of the factory output growth makes it abundantly clear that there is no slowdown in investment. The capital goods index rose 63% in July against a 0.3% decline in June and consumer durables, which grew 22%, maintained their average pace of at least 20% growth in the past one year. The growth story will continue and even gain further momentum unless money becomes more expensive. Besides, inflation is not purely a supply-side phenomenon; the demand-driven core inflation pressures are still potent.
While there is no doubt that the policy rates should go up to narrow the gap between inflation and interest rates (India’s headline inflation continues to be the highest among the Group of 20 major economies and real interest rates have been negative for quite some time now), the debate should be on the extent of the increase. Should the central bank go for a 25 bps hike in both the repo and reverse repo rates or should it repeat what it had done in July—a 25 bps hike in the repo rate and 50 bps increase in the reverse repo—to narrow the rate corridor? It can do so or even choose to go for a hike in both the rates by an identical margin and wait until November to get a clearer picture of global growth. All domestic macroeconomic indicators warrant a rate increase and RBI cannot afford to press the pause button now.
Of pins and cheques
I have been exchanging emails with the chief executive officer (CEO) of a private bank for the past few weeks on a silly issue—keeping pins at the ATMs where cheque drop boxes are kept. On three occasions in the past two months, I could not drop cheques as there were no pins to attach the deposit slips with the cheques.
It’s very irritating, particularly when getting parking space near an ATM is not easy. You always run with the cheque and a deposit slip to the ATM and want to drop it and rush back before your car is towed away for being parked in a no-parking zone. I tried at different ATMs at different locations in Mumbai and at different times of the day. I also noticed the wooden box (where the pins are supposed to be kept) has a narrow mouth and a deep pocket. Unless your fingers are magnetic, it’s virtually impossible to pick up the pins from the bottom of the box. The CEO of the bank is gracious enough to promise to look into this silly matter.
Early this month, I also discovered that I am a defaulter for a home loan that I had taken from a foreign bank and closed two years back.
The credit information bureau record shows I did not pay an instalment in July 2008. According to the bank, this happened “due to a technical constraint” and is being rectified.
It may not be a bad idea for RBI to run a customer satisfaction survey periodically. We need more banks not only for financial inclusion in rural India, but also for competition that will force them to serve customers better in the metros.
Tamal Bandyopadhyay keeps a close eye on all things banking from his perch as Mint’s deputy managing editor in Mumbai. Please email comments to firstname.lastname@example.org