Informist, Wednesday, Aug 4, 2021
By Siddharth Upasani
NEW DELHI – Monetary policy conduct in India should perhaps get its own proverb: if you look for room, you will find it.
After spending much of 2020 assuring markets that there was room for further easing, the Monetary Policy Committee has spent much of 2021 allaying fears that it is not going to normalise the extraordinarily loose financial conditions anytime soon. Reserve Bank of India Governor Shaktikanta Das was in fighting mode ahead of this week's meeting of the Monetary Policy Committee, giving two interviews in July to make the point that the jump in CPI inflation is transitory.
However, not everyone is convinced it is.
"Ultimately, what we need to care about is the underlying (inflation) trend. And we don't think the underlying trend is going to get back to where the midpoint is 4.00%," said Sonal Varma, chief India economist for Nomura.
"I think what inflation expectations are telling us is that the underlying inflation now is closer to 5.5%. When we had underlying inflation of 4%, inflation expectations were in the 8-9% range. They have now moved up closer to 11%," said Varma, adding that if the RBI's latest inflation expectations survey of households shows another rise, the transitory argument will start being questioned.
Inflation expectations, of course, were prominently on display in the minutes of the June meeting of the Monetary Policy Committee, with multiple members concerned they might settle at elevated levels after the three-month and one-year-ahead inflation expectations rose 70 basis points from March to 10.8% and 10.9%, respectively, in May.
For inflation expectations to reappear in the committee's statement on Friday will seemingly depend on the results of the latest survey. But Das and his fellow committee members may have found the policy room they were looking for as far as this week's meeting goes, even if the findings of the inflation expectations survey are uncomfortable.
Some might find it inappropriate, but the base effect is now a factor in monetary policymaking. The effect is favourable until October and could bring down inflation sharply by then--perhaps even under 4.00%.
The impact of the favourable base effect was visible in the CPI data for June when inflation came in at 6.26%. While this was a mere 4 bps lower than the print for May, it was well below expectations of 6.7%, with some economists even seeing the possibility of it touching 7.0%.
The role played by the high base in June got a hat-tip from RBI staff in last month's State of the Economy paper, which noted that the sequential price momentum of around 60 bps from food and fuel items was completely offset by a favourable base effect.
Then there are the measures taken by government to ease price pressures for some items which have been highlighted by the Monetary Policy Committee for over a year now: edible oils and pulses. Import duties have been cut, stock limits imposed, and memorandums signed to increase imports. Their impact on inflation should show up starting from the data for July. The committee can also find some solace here.
Most important of all, the risk to growth from a possible third wave of the pandemic will continue to loom over us either until it hits or vaccinations reach a critical mass.
NORMALISATION TALK
Das rebuffed talk of policy normalisation in June, taking a leaf from the US Federal Reserve's playbook to say it was premature to even talk about it at the time. Since then, circumstances have changed on most fronts. The deadly second wave of the pandemic has eased, allowing economic activity--as measured by Nomura and QuantEco Research's weekly indices--to come within touching distance of pre-pandemic levels.
Meanwhile, in the US, talk of policy normalisation has begun.
All this, in conjunction with the elevated inflation, suggests the Monetary Policy Committee cannot put off its own normalisation discussions for much longer.
"If Monetary Policy Committee and RBI want to prepare markets for a potential normalisation later in the year, it would be prudent to start with the soft signals as early as August rather than dismissing the elevated inflation altogether," ICICI Securities Primary Dealership wrote in a note last month.
Perhaps this week's meeting is too early to set the ground for normalisation or even talk about it. Room and reasons can be found for that too. But there is nothing the RBI and the Monetary Policy Committee can do to stop the markets from thinking, discussing, and anticipating it. All it can do is try and prepare them for the 'lift-off'. Until then, it has to search for reasons to not do so. End
Edited by Ashish Shirke
Cogencis news is now Informist. This follows the acquisition of Cogencis Information Services Ltd by NSE Data & Analytics Ltd, a 100% subsidiary of the National Stock Exchange of India Ltd. As a part of the transaction, the news department of Cogencis has been sold to Informist Media Pvt Ltd.
Informist Media Tel +91 (11) 4220-1000
Send comments to feedback@informistmedia.com
© Informist Media Pvt. Ltd. 2021. All rights reserved.
