Back in the day when the Reserve Bank of India had multiple objectives, this would be the point at which the central bank would reshuffle its priorities, and put growth ahead of inflation.
Today's inflation-targeting RBI does not have that luxury. But it still has wiggle room.
Remember, that the new Monetary Policy Framework Agreement signed in August 2015 ushered in a flexible inflation targeting regime, under which inflation control is the primary mandate but not at the expense of all else. “The objective of monetary policy framework is to primarily maintain price stability, while keeping in mind the objective of growth,” the framework says. It also allows the RBI to maintain inflation in a band of 4 (+/-2) percent, which means that even if inflation drifts to levels above the 4 percent mid-point for a short period of time, the central bank will not be seen as having compromised its inflation mandate.
Also Read | Layoffs Are Rising In Tech, But These Skills Are Helping People Unlock Better Pay
In explaining the flexible inflation targeting framework, the Urjit Patel Committee which recommended the change, had noted that the idea is to achieve the inflation target over the course of a business cycle while keeping growth concerns in mind.
Major central banks, in both advanced and emerging economies, have adopted flexible inflation targeting (FIT) under which the inflation target is aimed to be achieved on average over the business cycle, while accommodating growth concerns in the short run.Urjit Patel Committee Report
In short, the Monetary Policy Committee can choose to prioritise growth, should it decide that demand conditions are weak and require the support of monetary policy. That's the easy part. The tougher part is making a judgement on the nature of the slowdown. And, whether can lower rates aid a quicker recovery. The answer will lie in the RBI's analysis of growth, inflation, the government's finances and the global scenario.
Growth: Weak But Why?
The data point that may dominate the MPC's deliberations is gross domestic product growth, which fell to 5.7 percent in the first quarter of the current fiscal. Growth has now slowed for five consecutive quarters.
But why?
The underlying cause of weakness in the economy remains the lack of private investment and the twin balance sheet problem.
But those two factors don't explain the slowdown in recent quarters. The deceleration over the last two quarters is more likely to be linked to disruptions caused by demonetisation and the implementation of GST. Both these events have hit the informal sector, which does not get adequately captured in the GDP data. However, disruptions in the informal economy may be reflected in the surge in imports and weakness in rural demand. Not everyone agrees.
High frequency data hasn't given a clearer picture either. In September, for instance, auto sales rebounded strongly. However, the Nikkei Manufacturing PMI was unchanged compared to the previous month at 51.2, and remained below the long-run trend of 54.1.
Making sense of the growth picture will be key in deciding on whether more rate cuts are justified.
Risk Of Fiscal Slippage: How Real?
The second judgement that the RBI needs to make is, how real is the risk of fiscal slippage. The central government has already utilised 96 percent of its budgeted fiscal deficit for the current year. This is highest proportion of fiscal deficit utilised in the April-August period based, on data available since 1998.
The fiscal data, just like the growth data, has also been muddied by the lack of clarity on GST collections. Economists, however, fear that the risk of fiscal slippage is significant. In a note on Tuesday, Nomura Global Markets Research said that there is a 55 percent probability of the fiscal deficit slipping to 3.5 percent of GDP in the current year. Adding to the concerns on the fiscal front are calls for a fiscal stimulus and the continuing spate of state farm loan waivers.
The MPC – or at least the career central bankers on the committee – may fear that such expansionary fiscal policies could push inflation up past the current projections.
Inflation: Where Will It Settle?
Growth and fiscal concerns may dominate the discussion, but, in final analysis, the MPC will need to judge what all of this will mean for inflation. Retail inflation, which fell to a low of 1.46 percent in June, has since then normalised. In August, inflation measured by the Consumer Price Index stood at 3.3 percent, bringing it in-line with the RBI's forecast of 3.5-4.5 percent CPI inflation by the end of the current fiscal. Core inflation also rose in August, although some of this may be a one-time impact arising from the implementation of GST.
Apart from accounting for growth and fiscal trends in judging the future trajectory of inflation, the MPC will also need to take into account the impact of rising global commodity prices and a weaker rupee.
With all these uncertainties, some of which may settle in a quarter or two, will the RBI go back to playing the wait-and-watch game? Most economists think so. A survey of economists conducted by Bloomberg News showed the RBI is expected to hold the repurchase rate at 6 percent until end-2017. Even so, the MPC has room to surprise with a rate cut should its analysis of growth suggest a deterioration in demand conditions.
Ira Dugal is Editor - Banking, Finance & Economy at BloombergQuint.
Essential Business Intelligence, Sharp Market Insights, Practical Personal Finance Advice, Daily Fuel, Gold and Silver Prices and Latest Stories — On NDTV Profit.
