×
Home Companies Industry Politics Money Opinion LoungeMultimedia Science Education Sports TechnologyConsumerSpecialsMint on Sunday
×

Another rate hike in Sept?

Another rate hike in Sept?
Comment E-mail Print Share
First Published: Sun, Aug 14 2011. 08 13 PM IST
Updated: Sun, Aug 14 2011. 08 13 PM IST
The past 10 days in which the economic landscape of the US and the euro zone has changed should have an impact on India’s monetary policy, but that may not happen too soon with no signs of inflation coming down in Asia’s third largest economy. The market is vertically divided on what the Indian central bank should do when it reviews its monetary policy on 16 September.
Many economists believe that Reserve Bank of India (RBI) governor D. Subbarao will continue to tighten the policy and opt for yet another rate hike, the 12th in the past 19 months, and raise the policy rate to 8.25% before he presses the pause button. There are others who equally strongly feel that RBI should wait and watch before tightening the rate further. After all, it had raised the policy rate by 50 basis points in July, surprising the market, and by doing so, it’s ahead of the curve. One basis point is one-hundredth of a percentage point.
The latest factory output data, released on Friday, will hardly help RBI to make up its mind. The Index of Industrial Production rose sharply by 8.8% in June year-on-year, higher than the revised 5.8% in May, and significantly higher than what most analysts had estimated, but an unusually volatile capital goods index is responsible for this. The capital goods index rose 9.5% month-on-month after showing a decline in the past two months. The consumer goods index, meanwhile, continued to decline for four months in a row with both consumer durables and non-durables showing weak demand. In fact, consumer durables rose just 1% year-on-year, the slowest rise in 23 months. The decline in the Purchasing Managers’ Index—53.6 in July, down from 55.3 in June—also reflects weak investor sentiment. Domestic passenger car sales slumped by almost 16% in July, the first monthly dip since January 2009.
It’s pretty evident now that dear money has started dampening demand, something which RBI has been pushing for.
The developments in the US and Europe and the stock market meltdown have shaken business confidence and if senior bankers are to be believed, most corporations are shelving investment plans for the time being. Following this, concerns about growth will definitely be back on RBI’s radar along with managing price stability. But is the time ripe to press the pause button? One major positive for the Indian economy is the fall in crude prices. In Asian markets, the benchmark West Texas Intermediate fell to around $82 per barrel from at least $100 per barrel a week ago and Brent crude is trading at around $105 per barrel, sharply down from $125 in early August. India imports at least 75% of its crude requirements. If crude prices continue to soften, it will have a bearing on domestic inflation, but nobody is sure how long the decline in crude prices will continue.
At a bankers’ meet in Kathmandu, on Friday, Subbarao said it was important to bring down inflation to sustain growth and that it was too early to signal a change in monetary stance. The suggestion was clear—the central bank may not be done with monetary tightening as yet.
Earlier, meeting bankers in Mumbai, RBI deputy governor Subir Gokarn said unless inflation comes down, monetary policy will continue to remain tight.
The crude price decline may not last long because of the US Federal Reserve’s ultra-easy monetary stance. Last week, the Fed decided to keep interest rates at near-zero level till mid-2013 and said it would be ready to take further policy measures if economic conditions deteriorate further. Fed has held rates at near zero for more than two years since December 2008, and the economy is flooded with almost-free money. Its second quantitative easing programme that ended in June, and involved $600 billion of bond purchases, led to massive capital inflows into emerging markets and a surge in commodity prices. The Fed has promised to continue to consider additional measures to support the economy, but chairman Ben Bernanke may not find enough support for yet another quantitive easing programme. If he can push through that, the fresh flood of money will prop up commodity prices and the Indian central bank will find it extremely difficult to fight inflation. Wholesale inflation was 9.44% in June and is not expected to slow before October. In its quarterly review of monetary policy, RBI has, in fact, raised its year-end inflation projection to 7%.
Before RBI announces its semi-quarterly review of monetary policy on 16 September, July factory output data as well as wholesale inflation data will be available, as will first-quarter gross domestic product or GDP data. On top of all that, RBI will have a clear idea of the trajectory of the monsoon by that time. All of those factors will influence its monetary stance. There is a subtle difference between continuing with the tight money policy and making it tighter—the difference between taking a pause and going for another round of rate increases. A pause doesn’t mean the reversal of policy.
Tailpiece
My column last week on customer service in banks evoked strong reactions from banks and their customers. I refrain from reproducing their emails as I have no intention to play the role of a banking ombudsman. A couple of them have pointed out, and rightly so, that the quality of service is equally bad across the financial sector and it’s not fair to blame banks alone. Mis-selling of insurance policies and mutual funds is rampant in India. One retired bureaucrat told me he has not been able to continue with his insurance policies till they mature as his insurance agent always encourages him to prematurely withdraw money from old policies and start new ones to earn higher commission.
Tamal Bandyopadhyay keeps a close eye on all things banking from his perch as Mint’s deputy managing editor in Mumbai. Comment at bankerstrust@livemint.com
Comment E-mail Print Share
First Published: Sun, Aug 14 2011. 08 13 PM IST