The monetary policy committee\u2019s decision today to keep the policy rate unchanged is not surprising. It could have done nothing else. However what is surprising and somewhat concerning is its comments on possibility of a rate cut. While the comment may look fair due to lower inflation, it is actually not so because the core inflation (excluding food and fuel) has accelerated to 6.1 per cent in Oct\u201918. This is a bigger risk to deliberate upon rather than draw comfort from the decline in food and fuel prices. Here is a closer look on that and other issues deliberated upon by the committee.The monetary policy committee meeting this time was quite unusual since the inflation drivers have changed dramatically since the last meeting. While the primary dilemma of the meeting in October was about managing the impact of sharp increase in oil prices, the dilemma this time was how to manage the sharp decline in food and oil prices! The inflation figures for October added to this dilemma.<\/p>\n
The committee in its October meeting had projected inflation of 3.9-4.5% inflation for H2\u201919 (Oct\u201918-March\u201919 period). Against this, October inflation has turned out much lower at 3.3%, down from 3.7 in Sept\u201918 (November figure is not yet out). Further, its own projections based on large variety of data points have come down sharply from earlier 3.9-4.5% to 2.7-3.2%. The low reading of inflation which is significantly below the target level of 4% and even lower projections probably puts pressure on the committee to also look at aiding growth if the inflation looks controlled.<\/p>\n
However, actual inflation and projections have come down largely because of food and fuel prices. CPI excluding food and fuel has actually accelerated to 6.1% in October which is also corroborated by data on industrial activity. The industrial capacity utilization has risen sharply from 73.8% in Q1 to 76.1% in Q2 and has crossed the long term average by 1.2 percentage point. The survey of manufacturing sector shows that companies expect the selling prices to rise further with increase in demand. The increase in private consumption through higher disposable incomes (due to lower crude prices) will also lead to higher prices. This is indicated by the purchasing managers\u2019 index (PMI) for manufacturing which touched an eleven-month high of 54.0 in November signaling expectation of continued increase in industrial activity.<\/p>\n
And that probably warrants far more caution than the head room given by decline in food & fuel prices which are anyway, volatile and sticky in nature. Expectation of rate cut and a benign monetary policy builds up irrational expectations and disturbs the synchronization between output and demand. Policy direction based on the movement of core inflation should help strike better balance between growth and inflation rather than food & fuel.<\/p>\n","protected":false},"excerpt":{"rendered":"
The monetary policy committee\u2019s decision today to keep the policy rate unchanged is not surprising. It could have done nothing else. However what is surprising and somewhat concerning is its comments on possibility of a rate cut. While the comment may look fair due to lower inflation, it is actually not so because the core […]<\/p>\n","protected":false},"author":8,"featured_media":10006,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"footnotes":""},"categories":[857],"tags":[],"class_list":["post-10001","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-economy","membership-content","access-restricted"],"yoast_head":"\n