RBI must address slowdown, even as inflation rises

It should frontload rate cuts in its December monetary policy review

The Monetary Policy Committee of the Reserve Bank of India is scheduled to meet in the first week of December. With various economic indicators indicating that growth has slowed down considerably over the past few months, the consensus so far has been that the MPC will cut the benchmark repo rate for the sixth straight time in December, bringing it below 5 per cent. But the sharper than expected spike in headline retail inflation in October has complicated the policy choices before the MPC. Data from the National Statistics Office shows that headline retail inflation edged up to 4.62 per cent in October, up from 3.99 per cent in September, largely on the back of higher food inflation. Core inflation, which is essentially inflation excluding food and fuel, has moderated further, however, signaling continued weakness in demand.

In its last policy review, the RBI had lowered its estimate for growth this year to 6.1 per cent, down from its earlier assessment of 6.9 per cent. But there is little possibility of the RBI'S projections materialising, as various high frequency indicators suggest that growth is likely to fall below 5 per cent in the second quarter. So, while the MPC should carefully assess the trajectory of food inflation, its primary concern should be to arrest the slowdown. It should frontload the rate cuts in its December policy, though the magnitude of the cut will depend on the extent to which growth deviates from the RBI'S own projection.