Low Probability of Monetary Easing Despite a Fall in Core Inflation Ind-Ra-New Delhi-15 July 2013: India Ratings & Research (Ind-Ra) believes despite a decline in core inflation in June 2013 and the Reserve Bank of India’s (RBI) concerns on falling growth trajectory, the probability of monetary easing in RBI’s forthcoming monetary policy is low. Macro-economic data (index of industrial production (IIP), consumer price index (CPI) and June trade data) released on 12 July 2013 and head line inflation data released on 15 June 2013 are all pointing towards weak economic fundamentals. The IIP contraction in May 2013 suggests low demand conditions and monetary easing and is supported by a continuous decline in core inflation (declined to 2.09% in June 2013 from 4.27% in January 2013). However, the continuous rupee depreciation suggests otherwise. Ind-Ra believes a tight monetary policy, as followed by Brazil, must be implemented in India. However, the agency expects a status quo in RBI’s monetary policy stance and a hawkish tone of monetary policy statement. Ind-Ra’s expectation of low probability of monetary easing is based on a sharp depreciation of the rupee. India is a net commodity importer and a depreciating rupee adversely affects the trade balance and thus, the current account balance, putting further pressure on the currency. A weakened rupee and increasing crude oil prices directly affect oil subsidy. Also, other subsidies such as fertiliser are affected by a depreciating rupee. A weak rupee also erodes the corporate sector’s profitability, leading to a slower growth of corporate taxes. All these put together will lead to increased fiscal imbalance. A rate cut/monetary easing along with the weakened rupee will further aggravate inflation. A few public sector banks have started cutting their base rates, leading to some monetary transmission after RBI’s monetary easing since early 2013. Ind-Ra expects a good Rabi production (crops sown in 2012) and a good monsoon expected this year to help revive domestic demand. Investment demand revival will still take time, unless policy issues affecting investment sentiments are resolved quickly.
Posted on: Tue, 16 Jul 2013 15:42:38 +0000
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