Case for an inter-meeting rate hike

A ‘rate hike in time is just fine’ is a wise RBI saying. With CPI inflation at near-historic lows, this must mean, according to the RBI law of mean reversion, that the future will bring high inflation. Hence, the urgent need for intervention

Raghuram Rajan in 2013, India had used the WPI as its primary indicator of inflation. All the serious RBI research over the last sixty-odd years was based on the WPI; rumour has it that Rajan brought about the change to the CPI over serious objections from RBI staff who had made a career out of examining minutiae in the WPI innards. And Rajan snatched the WPI toy from RBI staffers. How would your 10-year-old feel if his action figures were taken away, without reason, and he was told to go read Harry Potter?

The WPI for February 2017 has come in at 6.6 per cent, the highest in the last 41 months: Just the previous month, WPI inflation was 5.3 per cent. An acceleration from 5.3 to 6.6 per cent in the RBI staff-preferred indicator, that too, in just one month? What more evidence is needed to prove the RBI assessment right about impending, and galloping, future inflation?

Third, notice how wrong the CPI is as an indicator of inflation. While the WPI has been exponential in its rise, the CPI has been exponential in its decline — CPI inflation has averaged less than 4 per cent for each of the last four months and is likely to do the same for March 2017. Only as recently as December 7, 2016, the RBI, anticipating Modi’s victory in UP and near-double digit WPI inflation, said in its Policy Statement that CPI “headline inflation is projected at 5 per cent in Q4 of 2016-17 with risks tilted to the upside”.

It is very unlikely that the Jan-mar 2017 CPI inflation will be much different than 3.5 per cent — almost 150 basis points below the RBI forecast of 5 per cent plus made just two months ago. However, this low inflation reality is not necessarily indicative of the RBI being grotesquely wrong in its very short three-month inflation forecast. For, as the inflation experts at the RBI will no doubt educate us, CPI inflation follows WPI inflation with long and variable lags, and so, CPI inflation will traverse above 5 per cent very soon. And it is the future RBI expectations on which RBI policy is based.

Also, adding to the prospects of higher C R Sasikumar

inflation in the future is the fact that true core inflation (CPI inflation minus food minus fuel and minus petrol) has come in at 4.22 per cent in February, the lowest level since the 3.7 per cent registered in June 2008, some 103 months ago. In the February MPC meeting, the RBI had emphasised how sticky core inflation had been. Core inflation has been anything but sticky; more like a steep slide.

Also aiding the RBI assessment of inflation in India is the value of the Indian rupee — at 65.3 per dollar, this is the strongest level since October 2015. Whatever goes up must come down is the best forecast one can make about the rupee — and the reverse for core inflation. Central Banking 101 — bet on mean reversion! The MPC has to act according to its perceptions of the future; very likely the RBI is viewing this strength in the rupee, and trend decline in core inflation, as something that has run its course and should soon be reversing.

In addition, the US FED just raised rates by 25 bp and warned they might raise the US Fed Funds rate by another 50 bp over the year. Isn’t it a “historical fact” that if US short-term rates go up, Indian rates must go up by at least the same amount— else we will have capital fleeing the country, as Indians find it worthy to invest in 2 per cent yields in the US, rather than the 7.5 per cent yields obtained in India.

A “rate hike in time is just fine” is a wise RBI saying. No matter what set of data one examines — political uncertainty, populist spending, WPI inflation, CPI inflation, CPI true core inflation or US fed funds rate. All data point to the urgent need for the RBI to raise the repo rate by a minimum of 25 bp with immediate effect.

India is fortunate to have an MPC that truly looks ahead, correctly anticipates the future and always acts in the best interests of the economy, and the nation.

Surjit S Bhalla is Contributing Editor, ‘The Indian Express’, and Senior India Analyst at Observatory Group, a New York-based macro policy advisory group. Views are personal IN FEBRUARY, THE chief justice of the supreme court of “Pakistan-administered Azad Jammu and Kashmir” (AJK) imposed compulsory namaz on the court bureaucracy, and no one in Pakistan thought it was anything out of the ordinary. Chief Justice Ibrahim Zia actually made his inaugural speech impressive by his own reckoning as a Muslim-first-and-judge-later, telling his staff they should offer their prayers punctually behind him. Then he added something that should have caused alarm: “Your annual salary increments will now hinge on your offering prayers regularly and on the prescribed times. To make sure you offer your prayers regularly, I will be secretly checking observance”.

Justice Zia was an advocate of the AJK Supreme Court from 1984 and was elected president of AJK’S Supreme Court Bar Association. That he must be a pious man, there is little doubt of. But why does he want to do something that his counterpart in Pakistan’s supreme court is not doing?

Pakistan suffered this kind of coercion in 2009 too. In Malakand, the de facto ruling Tehreek Nifaz-e-shariat-e-muhammadi (TNSM), led by Sufi Muhammad, imposed Qazi courts in the territory under his sonin-law, Mullah Fazlullah. Prayers became compulsory, but like Saudi Arabia, the lawyers were no longer allowed in the courts. Sufi Muhammad is now in prison and his terrorist son-in-law has fled to Afghanistan as chief of the Pakistani Taliban. Another warlord, Mangal Bagh of Khyber Agency, had imposed compulsory namaz in the mosque by outlawing it at home. He too is now in Afghanistan.

Judges happen to be most attracted to coercion under Islam. Namaz is regarded as “farz” (compulsory) like zakat (religious charity tax), and presumably enforceable on pain of punishment. Some judges, not able to lay down the law from their court, showed the way by their behaviour. One judge of the Lahore High Court would withdraw to a mosque near his residence and perform a pious night vigil, covered by the media. He couldn’t impose the practice on others because Islam, Muslims say, doesn’t allow coercion. Heavily bearded Justice Nazir was so fond of punishing blasphemers,hetoldapublicmeetinginlahorethat they should kill blasphemers on sight.

The latest news is about the pious judge of the Islamabad High Court, Justice Shaukat Aziz Siddiqui, allegedly shown in a photograph when, as a lawyer, he kissed the killer of Punjab governor Salmaan Taseer after the governor was accused of having defended a poor Christian girl under a death sentence for having allegedly insulted the Holy Prophet (PBUH). (Siddiqui denied it was him.) But now, as a judge of the Islamabad