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Last Updated : Dec 02, 2019 05:23 PM IST

We need a ‘surprise’ in monetary policy this time

A surprise in the form of keeping policy rates constant will in fact be much desirable

Moneycontrol Contributor @moneycontrolcom

Tulsi Jayakumar

The fifth bi-monthly monetary policy report of 2019-20 due on December 5 is likely to hold no surprises. We expect the accommodative monetary stance to continue, along with a reduction in the policy rate by 15-40 basis points to 4.75- 5 per cent.

Domestic economic considerations are going to be the most important determinant of the monetary policy direction. The economy is in a shambles. The quarterly GDP growth slid for the sixth time successively, with the September quarter registering 4.5 per cent. The figure also breached the psychologically important mark of 5 per cent on the downside for the first time in seven years.


The supply side turned worse. Quarterly GVA -- a true reflection of the production in the economy -- grew by only 4.3 per cent. The one sector which has propped up this growth is public administration, defence and other services, which has grown 11.6 per cent during July-September. This came against a sub-4 per cent growth and contraction in other key sectors -- agriculture (2.1 percent), mining and quarrying (0.1 percent), manufacturing (-1 percent) and construction (3.3 percent).

Even IIP (index of industrial production) for September did not inspire much confidence. The manufacturing sector slump has been particularly severe, with 17 of 23 segments recording negative growth from a year ago. The sharpest contraction is in motor vehicles (-14.9%), fabricated metal products (-13.6%) and paper and paper products (-13.1%).  Following the Use-based classification, YoY growth rates in September 2019 stood at (-5.1 percent) in primary goods, (- 20.7 percent) in capital goods, 7 percent in intermediate goods and (-6.4 percent) in infrastructure/construction goods. Consumer durables and consumer non-durables recorded growth of (-9.9 percent) and (-0.4 percent), respectively.

On the demand side, the government consumption expenditure has been the big prop, growing in real terms at 15.6 per cent during Q2, from 10.1 per cent a year before. Consumption expenditure has grown at 7.8 percent (current prices) and 5.1 percent (constant prices), just about half the rates in the same quarter last year. The worst affected is investment, which in real terms has increased 1 per cent in the September quarter, compared to a real increase of 11.8 per cent in Q2 of 2018-19.

Growth through the external sector continues to remain bleak, with exports in real terms decreasing by 0.47 per cent as against an increase of 12.8 per cent in the year-ago period.

The gloomy picture on the growth front will definitely influence the Reserve Bank of India’s decision. However, compared to the last monetary policy announcement, things are no longer the same on the inflation front. Headline inflation, which had been at a benign 3.21 per cent for August 2019, below the medium-term target of 4 per cent, is no longer low.

The Consumer Price Index (general) grew steadily to 3.99 per cent in September and breached the 4 per cent mark (at 4.62 per cent) in October. The Consumer Food Price Index (CFPI) came in at an alarming 7.89 per cent in October. Urban CFPI at 10.47 per cent is worse, and a perusal of the disaggregated picture reveals an even more disturbing picture.

Inflation for other necessities, which constitute the majority spend for an average Indian, has risen dramatically. Food inflation is at 6.93 per cent. Within food, vegetables and pulses -- the staple of every Indian -- are witnessing high inflation. Vegetable inflation for rural, urban and combined stood at 21.07 per cent, 35.42 per cent and 26.10 per cent, respectively, while corresponding figures for pulses read 9.64 percent, 15.90 percent and 11.72 per cent.

The assumption that the current slowdown is demand driven and can be spurred through reduction in cost of capital is completely flawed. The RBI would be better advised to exercise caution, and not add to the woes of the common man by contributing to a rate cut-induced inflation.

It may also do well to undertake a study to see the impact of steep rate cuts on growth as well as inflation; in particular, how much of the current increases in inflation have been facilitated by these rate cuts throughout the year. The efforts should be focused on kick-starting the economy by paying attention to consumer and business sentiment -- implementing the necessary regulatory reforms -- which will bring about the much-needed changes. A surprise in the form of keeping policy rates constant will in fact be much desirable.

Tulsi Jayakumar is Professor of Economics and Chairperson, Family Managed Business at S P Jain Institute of Management & Research, Mumbai. Views are personal.

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First Published on Dec 2, 2019 03:35 pm
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