Three billboards that helped the RBI firm up its decision to cut policy rates
1 min read.Updated: 08 Feb 2019, 12:51 AM ISTAparna Iyer
It’s clear that it’s the benign outlook on inflation that is largely responsible for the rate cut by the RBI
The crux of RBI’s surveys was that Indians believed inflation may be benign going forward, while businesses saw marginal improvement in future prospects
Central banks look to the future for decisions and not past data. To that extent, the Reserve Bank of India’s (RBI’s) surveys that capture sentiment and expectations of households and businesses are crucial.
The crux of RBI’s surveys was that Indians believed inflation may be benign going forward, while businesses saw marginal improvement in future prospects.
Individuals were more sanguine on future economic prospects, while companies believed cooling input prices will improve profit margins.
Cast your eyes on the adjoining three charts that may reveal the reasons for the central bank to slash policy rates.
Chart 1 shows that inflation expectations have been firmly anchored, as households now expect inflation to fall in the coming three months as well as a year ahead.
It is clear that the trend has been downwards over the past one year, proof enough that persistent deflation in food prices has led to such expectations. After all, food is a big part of household budgets and low vegetable prices have made Indians believe prices would rise more slowly than before. However, high core inflation could make this tricky going forward.
Chart 2 shows that the consumer confidence index improved in December, although it was still in pessimistic territory (below 100). Some high-frequency indicators such as falling auto sales have sounded caution on private consumption lately.
This buttresses RBI’s thread of caution with regards to growth, even though it must be said that surveys don’t sound a big caution on the growth front so as to warrant a rate cut.
Finally, Chart 3 shows that while capacity utilization has improved over the last two quarters, there remains considerable slack in the system. The outlook on order books is modest with new orders declining in the second quarter.
All told, it’s clear that it’s the benign outlook on inflation that is largely responsible for the rate cut by the central bank.