By Anjan Roy
Prices of late have shown southward trends. Should that result in RBI loosening its anti-inflationary stance? There is a view that the Reserve Bank of India should now initiate the process of reversing its stand on inflation and start lowering the lending rates from sometime early next year.
This comes on the back of the easing of price pressure witnessed for a while. The latest price figures released by the government shows a continuing negative trend in the wholesale price index. Almost from the beginning of the current financial year, the whole price has remained in the negative zone.
Earlier, the RBI used to take the wholesale prices as the benchmark for fixing its monetary policy stance. However, this was changed and the RBI shifted to the consumer price index as its guidepost for the overall prices and determining its monetary policy accordingly. This is in tune with the prices of there central banks as well.
Since the inflation targeting practice of the RBI pegs the inflation level at 4% “plus/minus 2%”, the current level of consumer price index is well within this level. In fact, the Consumer prices have been around this tolerance band for this financial year excepting the month of July when it breached the band.
One can expect that the prices should remain benign for the next quarter as well since it is this time of the year that prices tend to maintain a lower print. The consumer price index is tilted more in favour of food articles than the wholesale index.
Post October, the prices of food items tend to remain stable, if not falling. With the new harvests coming on the market, the prices of vegetables and all other fresh produces get depressed. It is during the lean months of the summer that the prices again show rising trends. These start influencing the general prices northwards.
Kinks in the supply chain and shortages of warehousing facilities earlier used to compound the fluctuations in prices between the post-harvest period and the lean months. The situation is however improving and the stock holding of fresh produce could be much better these days. As a result, the price fluctuations should even out in future.
The monetary policy stance could not be formulated only on the basis of the inflation print narrowly. It is important that the judgement of the policy makers also given a much greater play. Their perception about the price trend for the medium term is as much important as the data as such. This used to be emphasised by none else than the former T+RBI governor, gram Rajan.
India’s monetary policy stance will be determined by a combination of factors in the medium term. Of these, the overwhelmingly deciding factor should be, in our view, the forthcoming election year. As such, with the state elections on-going now, there is a lot of uncertainty about the political dispensation in near future.
An election is marked by a spurt in expenses. The election expenses are mainly in cash and these percolate down the economy. At any rate, the huge election expenses have to be organised and these create pressures on the overall system. The finances are mobilised from the private sector and the businesses ultimately.
On top of the current crop of state elections, the general election next year will be the major incidence. A general election is a massively expensive affair and in spite of all the restriction on election expenses by candidates, there is a run-off. It is extremely difficult to estimate the amount of excess spending overall by the political parties.
All said and done, the elections would generate and add huge amounts in unaccounted money. These have been found to be purely inflationary.
Additionally, the political parties keep giving extravagant promises to woo the electorates and these at least in the first year have to be partially fulfilled. We are witnessing the wild promises that the rivals are extending to attract attention. Thus, as such, the election process imposes major burden on the economy.
In such circumstances, standing at this juncture, it would be a cautionary tale from the RBI. It is difficult to imagine that the RBI would sinking of unwinding its anti-inflationary regime anytime in the first half of next year. Then depending on the way the prices behave, it might start considering some loosening from the second half of next year.
The overall state of the economy should be taken into account in this process, needless to say. India is currently growing at a comfortable pace, considering that the global economy is in none too good a shape. With uncertainties rising flowing from the wars in Middle East and in Europe, the situation is fraught with dangers.
If anything, India must now gird up to face global headwinds. IT has been seen that problems first arise in the financial markets which were then transmitted to the real economy. Even little disruptions lead to changed perceptions about the future.
These could set in motion global financial markets turbulence. Such developments are not unknown. A much less riskier situation in the past decade had resulted large scale movement of capital from the emerging market economies to the developed markets, mainly in the US. The last episode of financial markets turmoil was during the tapering of US quantitative easing.
India is now fairly well positioned to negotiate global economic turbulence. Instead of being overambitious and seek a faster clip of growth, the entire gamut of economic policies should now be well coordinated so as to gather cushion to meet such exigencies and maintain stability in the domestic economy. (IPA Service)