Rate cut odds rise, but RBI should wait to be sure1 min read . Updated: 13 Jul 2017, 09:38 AM IST
RBI needs to look beyond the noise in the inflation data, and wait and watch for some more time before taking a decision to cut rates
The odds of a rate cut from the Reserve Bank of India (RBI) will increase with the Consumer Price Index (CPI)-based inflation for the month of June coming in at 1.54%, well below the 2-3.5% range it had predicted for the first half of the year. Nevertheless, as Gaurav Kapur, chief economist at IndusInd Bank Ltd, points out, much of the fall in inflation is on account of cheaper vegetable and pulses prices and due to the base effect. As RBI had pointed out in its last monetary policy statement, “The prices of pulses are clearly reeling under the impact of a supply glut caused by record output and imports." Vegetable prices have already moved up in July. In fact, the food price index has moved up from 132.4 in May to 134.1 in June.
The monetary policy statement had also talked of the risks arising from fiscal slippages due to farm loan waivers and from the disbursement of allowances under the 7th Central Pay Commission award. As the chart shows, there hasn’t really been much of a change in core inflation in recent months. Keeping these factors in mind, Kapur says that the central bank needs to look beyond the noise in the inflation data, and wait and watch for some more time before taking a decision to cut rates.
In any case, liquidity is ample, lending rates have fallen and a further 25 basis point cut is unlikely to do any wonders for investment demand. A basis point is one-hundredth of a percentage point.
Postscript: India’s industrial production growth driven by digestive enzymes and antacids
The production of digestive enzymes and antacids pushed up industrial production in May 2017 by 2.4%, according to a press release put out by the ministry of statistics and programme implementation. This is so despite the item having a weight of 0.22% in the Index of Industrial Production (IIP). Other items dragged down production, so that overall IIP went up a mere 1.7% in May 2017, compared to 8% a year ago.
Digestive enzymes and antacids had also contributed handsomely to industrial growth in April 2017.