Rbi governor Shaktikanta Das.  (Reuters)
Rbi governor Shaktikanta Das. (Reuters)

In RBI's fight of compulsions and numbers, will it be North Block's day?

  • The MPC is mandated to target headline inflation based on consumer price index
  • CPI inflation fell to an 18-month low of 2.19% in December, staying below the medium-term target of 4% for five consecutive months

North India has seen an extended winter this time, definitely the longest in many years. The warmth of a cut in key interest rates by the Reserve Bank of India’s (RBI’s) Monetary Policy Committee (MPC) is just what the mandarins in the country’s national capital would be hoping for when the six-member panel announces its decision Thursday after a three-day meeting.

It’s Shaktikanta Das’ first MPC meeting since he took over as RBI Governor on December 12. While reams have been written about how infectious the seat of RBI governor is — babus going from North Block to RBI suddenly acquire the avatar that the post deserves — Das may prefer to blind himself from the epithets.

It’s the last MPC meeting of the financial year and the second last before the general elections – that one time when the government would like a little help from the RBI. Will the six learned men oblige? Das’ vote would be crucial in case of a 3-3 tie.

The MPC is mandated to target headline inflation based on consumer price index (retail inflation). As per its target for the current period, that is set at 4% (+/- 2). From 4.92% in June, CPI inflation fell to an 18-month low of 2.19% in December, staying below the medium-term target of 4% for five consecutive months.

Future projections are the determinants of policy action in an inflation-targeting framework. For the first six months of the next financial year, those numbers are projected to be modest — 3.8%-4.2%.

But there’s another figure that could spoil it for North Block and that’s the core inflation number — a result of headline inflation minus the food and fuel prices. Ever since the panel was formed in June 2016, core inflation has been below the headline number only once. Since October 2016, core inflation has averaged 5.2%, while the average is 3.7% for headline.

Core inflation feeds into headline inflation and hence the MPC, if it chooses to go beyond its immediate mandate and look at core number, may be compelled to leave the repo rate unchanged at 6.5%.

If the MPC decides to digress further and there’s nothing preventing it from doing that, another number that may hold it back from any generosity to the growth-hungry government is the fiscal deficit.

According to Union Budget 2019-20, the government has slipped on its fiscal deficit for the second year in a row and the next financial year too won’t see any fiscal consolidation. That number slipped by 10 basis points to 3.4% after revision and is projected to stay the same in the next 12-month period starting April.

It’s an expansionary Budget, led by tax cuts and doles, only exemplifying that Indian governments, irrespective of the party in power, are champions of profligacy. Surely, the credit rating agencies are not impressed, not even Moody’s, the most benign on India of the lot.

But the fiscal deficit number is secondary to headline inflation and hence that number being disappointing doesn’t entirely tilt the game in favour of a ‘hold’ on rate cut.

One change that’s certain to happen is the change in RBI’s stance to ‘neutral’ from ‘calibrated tightening’. But the cheerleaders won’t be happy with just a change in stance that comes without a rate cut. They are high on josh.

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