With consumer price inflation close to 10 per cent and growth closer to 5 per cent, the upcoming Credit Policy may be the tightest ever for Governor Duvvuri Subbarao. He may have tried to remove the shock element by repeatedly saying he is uncomfortable with double digit consumer inflation and 7 per cent- plus wholesale price inflation. The market is nearly sure he won’t cut rates. But only nearly. There is a small voice that says, how long can he ignore growth?
The Governor has also read the riot act to the Government saying he can’t cut rates and up demand when the govt. is creating demand to the extent of 6% of the GDP by spending more than it earns. Four and half years of fiscal profligacy has created so much aggregate demand that he has to do more than his bit to tighten the demand side. But again, the market will want to watch how far he can carry this fight.
Latha Venkatesh, Banking Editor & Associate Editor - Financial Markets, CNBC-TV18, stated, “A CNBC TV 18 poll of bankers, economists, and industrialists showed that 90% of the market isn’t expecting a rate cut.. Even if the governor doesn’t cut rates on July 31, can he hold out beyond another 6 weeks? That’ll be tough since theQ1 GDP numbers will be out by then. If it is indeed another 5%+something, it is likely the RBi will under tremendous pressure to cut soon thereafter.”
The market will also want to see the monetary policy stance and his guidance. Will he soften? Will he say we can’t sacrifice growth beyond a point? Or will he say he isn’t sacrificing growth, only ensuring enough savings for growth by keeping interest rates above the inflation rate. Or will he guide to say he has done enough on inflation and the impact will follow?
The RBI’s growth forecast will be another big number to watch. In April the central bank guided that GDP this year will grow at 7.3%. But thereafter came the 5.3% number for Q4 of last year. Most economists have been shocked by that number and have rapidly brought down their FY13 India GDP forecasts closer to 6%. Will RBI do likewise? Or will it stay closer to 7% and break the bad news gently. Or will it believe the truth will have to told and guide for a long bleak year or years ahead.
Its inflation forecast is a tolerable but not necessarily comforting 6.5% by March end. Will it reiterate this number or believe things will get worse. A bunch of CFOs who participated in the CNBC TV18 poll say inflation will fall to 6%, even below, by March 2013. They sense the writing on the wall, the rapid drying up of demand and their pricing power. But will that be enough for RBI. Will a bad drought worsen inflation? And if so will the RBI have the courage to continue to chase inflation down? Also will that be wise? Economic sentiment has gone to pieces and the polity is too fractured and self seeking to care. RBI, the only responsible entity, is being asked to do much more with minimal policy space and tools. And a flip flop from dove to hawk to dove to hawk also won’t help. The RBI’s walk in this policy is going to be important for business sentiment. It’s talk will be even more important.