The Gold Standard | India’s monetary policy

Short, concise and good comment by Ajit Ranade in MINT on why RBI should hike rates today. 25-basis points is baked in the cake since that is what RBI’s review of macro-economic developments suggest, at the minimum.

The central bank’s comments on the fiscal policy stance of the Federal government are worth noting:

The total fiscal slippage for the Centre from oil sector, could thus be about 1 per cent of GDP. In addition, there could be spillover in fertiliser subsidies. Therefore, for durable correction in revenue account, tax buoyancy must recover to the pre-crisis level and administered pricing of diesel, kerosene and LPG needs to be phased out at the earliest. Besides, fertiliser subsidies need to be contained.

The Central Bank is much more sanguine on the finances of State governments:

Overall, States seem to be committed to bring their finances on a sustainable path in the medium-term and the present pace of fiscal consolidation appears to be in tandem with the path suggested by the Thirteenth Finance Commission. Thus, the fiscal position of the States appears encouraging, but the challenge lies in translating intentions into outcomes of fiscal consolidation, while not compromising on the quality of the fiscal correction process.

India’s external trade charts on page 15 of the report are reassuring. Dependence on various products and export locations has become more broad-based and less concentrated.

Very encouraging to note that the FDI Inflows into India have picked up in the first two months of the current fiscal year (2011-12). It is 7.8 billion dollars compared to 4.4 billion dollars in the previous year. Outbound FDI remains sizeable, however.

The table on page 29 based on trailing P/E ratios shows that Indian stocks remain the most expensive in the region, followed by Indonesia.

Chart VI.1 on page 38: Are Indians eating more junk food? What is ‘Others’? Consumption share of fruits and vegetables has remained stagnant. Disappointing.

Chart VI. 11 on page 45 is an excellent on rural wage growth over inflation. It compares two years: 2009-10 and 2010-11. Wage growth in 2010-11 has far outstripped inflation in almost all states except in Manipur and Tripura whereas in 2009-10, it was trailing inflation in 11 states.

On the inflation situation, these sentences are apt (page 45):

High inflation over several months has not led to price induced supply response in many critical commodities; in turn input cost pressures have spilled over to output prices. These trends necessitate structural reforms to enhance supply response while anti-inflationary bias of monetary policy anchors inflation expectations.

On reading this report, I get the impression that they should raise rates by 50 basis points and not just 25 basis points. We will know soon.


DISCLAIMER: This is an archived post from the Indian National Interest blogroll. Views expressed are those of the blogger's and do not represent The Takshashila Institution’s view.