ALL EYES ON 4TH OCT, FINANCE MINISTER’S VIEW ON MONETARY POLICY

While talking about monetary policy on Friday, 16^th September, Finance Minister Arun Jaitley said a drop in retail inflation should be taken in to consideration by the RBI during the 4^th Oct review. This comment is expected to put the newly appointed RBI Governor Urjit Patel under pressure to cut rates and help boost the economy ahead of the review.

When asked if declining inflation had made room for rate cut, the FM said he expects when the policy review takes place next month, the RBI and the Monetary Policy Committee (if it is constituted by then) will keep all these major factors in mind.

It is expected that a six-member MPC will set interest rates rather than the RBI governor, though Patel will be a member with a casting vote. While speaking to the reporters on Friday after a review of state-run banks, FM said their bad loan burden remains challenging.

Jaitley also added that SBI’s process of absorbing the associate banks will go as per the plan.

According to the latest statistics, consumer inflation eased to a five-month low of 5.05 per cent in the month of August from a high of 6.07 per cent in the previous month. It is projected to decline further on the back of a satisfying monsoon over most of India. Other arguments in support of rate cuts stem from the industrial growth dipping 2.4 per cent in August ‘16 and GDP growth slowing to 7.1 per cent in the June quarter from 7.9 per cent in the preceding one amid worrying signs that investment shows no signs of picking up.

Experts opined that there was scope for a rate cut. The August CPI (consumer price index) has opened up the possibility of a 25 bps rate cut in the 4^th October policy as the ‘upside risks’ conceived by RBI to its March 2017 CPI target have substantially gone down now. A basis point is 0.01percentage point. The central bank has an inflation target of 5 per cent consumer inflation by March 2017.

The monetary policy outline agreed by both government and RBI has set a consumer inflation target of 4 per cent with a two percentage point margin on either side over the period of next five years. If the MPC is not set up by 4^th October, then the RBI governor will take a call on the monetary policy.

Lot of anticipations will be put to rest after the Feds meet on 21^st September. If the Fed shows interest in increasing the interest rate, then it will be difficult for the central banks of the emerging economies to cut the rates.

Inflation is one of the biggest economic evils in a country with sizeable chunk of poor and it needs to be addressed before anything else. However, the big relief is that the RBI now has an understanding with the government on the inflation-fight. Earlier in August, the government agreed on the 4 per cent (2 per cent more or less) CPI inflation target for the RBI till the year 2021, thereby boosting the confidence of the monetary policy makers in the Mint Road to proceed with inflation addressing monetary policy measures.

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