RBI, heal thyself

C3: The RBI's policy statement has a good discussion of the risks to the global economy, and that world growth faces headwinds, even in the US. If global growth risks remain elevated, with little prospect of world growth equalling potential, let alone overheating, does this not argue for a more aggressive rate cutting policy?

C4: Not recognising that Indian growth is worse than it appears. The RBI continues to use year-on-year growth rates, but it is heartening to note that when it suits its "goal" (as in discussion about industrial production where it wants to argue that recent growth is not all that bad!) it pronounces on seasonally adjusted annualised rates (SAAR). Well, if the RBI were to apply seasonal adjustments to GDP growth, it would find that the first half of fiscal year 2012-13 had a growth rate of only 4.5 per cent (SAAR of 5.7 per cent in the April-June quarter and 3.3 per cent in the July-September quarter). Which means that the second half will have to witness an average 6.5 per cent SAAR for the RBI forecast of 5.5 per cent growth for the current fiscal year to be correct. That is unlikely — which means that the RBI's revised forecast will be wrong by a full percentage point, that too for a year which ends in just two months. Embarrassing, no? For policy purposes, does this low growth reality not warrant a higher rate cut now and much more to come in future?

C5: Even the prime minister has admitted to high procurement prices as a major explanator of high food inflation. And such high prices are on their way down, or at least their rate of change. Just a month ago, the procurement price of wheat was raised by 5 per cent, in sharp contrast to the increase of 15 per cent in the procurement price of rice in the populist go-go days of May 2012. If the wheat price is anything to go by, procurement prices in 2013 are likely to average around 5 per cent. This will be the lowest increase since the 3.6 per cent gain in 2006. And this decline should clip off 1.5 per cent from the CPI. Incidentally, November 2012's SAAR for the CPI industrial workers was a low 4.3 per cent; for the last three months, a low 5.8 per cent. Which means that in the pipeline is a potentially sharply slowing trajectory of CPI inflation. And does low inflation also not warrant a sharper cut in repo rates?

... contd.

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