RBI’s turn

The government’s barrage of announcements complicates Governor Subbarao’s choice

Have the bold and belated policy announcements over two days — or three,if you count the Planning Commission meeting on Saturday — altered any of the concerns and calculations of Reserve Bank of India (RBI) Governor D. Subbarao? More specifically,have they convinced him to cut rates? As he releases the mid-quarter review of the monetary policy for 2012-13 this morning,markets,analysts and every Indian with an interest payment to make every month,will be watching him for his answer to the tricky question the government has lobbed at him. The frisson of expectation is entirely caused by the appearance of a government,so far seen to be struggling with a dismal cocktail of corruption charges,coalition compulsions and sheer lack of will,attempting to turn the tables on its critics and opponents. It has raised oil prices,the first time in two years,picked up the gauntlet on allowing foreign investment in multi-brand retail,something it dithered on since 2005,permitted foreign airlines to pick up stake in domestic aviation companies and even tweaked the rules for a more accommodative single-brand retail foreign investment,all in slightly over 48 hours.

Misgivings will persist,despite the breathless announcements. At the Planning Commission meeting on Saturday,the prime minister acknowledged that,even now,there is a clear and present danger of slipping to a 5 per cent annual rate of growth for the economy. For the first time in more than a decade,an Indian prime minister has accepted the possibility of the GDP growth rate slipping so low. There are reasons for his concern. The new oil bill will correct for even less than the Rs 20,300 crore the government has claimed it will shave off from the total subsidy bill for the year,with less than seven months of the fiscal left to make more changes. The current account deficit for this fiscal is expected to end at 3.6 per cent of the GDP,but that’s assuming the net foreign investment flow into the economy picks up beyond the $9 billion it has recorded till September 14.

The set of policy measures announced last week is unlikely to yield results this fiscal. The headline inflation at 7.55 per cent is high and is climbing again. Two weeks later,the diesel price rise will push it one per cent more. Yet if the RBI governor wants to vote for optimism on the economy,a 50 basis point cut in repo rates will do nicely.