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Inflation has eased, RBI may cut rates. But government must do more to revive investment
The latest numbers show that inflation has eased slightly. Indeed, both food inflation and core inflation have declined. Considering the data and the slowdown in non-food credit, the RBI could now cut interest rates. It is important that inflation continues to come down, and the RBI must watch the numbers carefully, but the current data suggests that this is likely to happen, particularly if the rupee stays steady, keeping the price of tradables in check.
The postponing of the GAAR is expected to have a stabilising effect on foreign inflows. This would mean that the rupee will stay steady and the recent decline in tradable price inflation, or core inflation, measured by non-food, non-oil prices, is likely to hold. This is the data the RBI looks at, rather than the more volatile elements of inflation like food inflation or the administered inflation rate arising from the fixing of oil prices. The rupee may, however, continue to be under pressure if the current account deficit remains high. The RBI is likely to watch the rupee while making its inflation forecast and hence, its monetary policy decision. Another worry for the RBI in cutting rates has been the sharp decline in the financial savings of households. If inflation comes down, then the real interest rate consumers receive on their financial savings will be higher. In this context, the decline in inflation is encouraging. With higher inflation, it would have been difficult for the RBI to cut rates further as it could have reduced the real return to savers. One of the problems the decline in savings creates is the high current account deficit, creating a further feedback loop to higher inflation through a possible rupee depreciation.