Not at this rate
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Recovery will need sustained, broadbased increase in industrial production. First, RBI must cut rates
News of positive growth in industry, exports and car sales, a small decline in inflation, and changes in the regulations for foreign investors, has rekindled some optimism on the Indian economy. This week, RBI Governor Raghuram Rajan will announce his first monetary policy. Expectations are that he will reverse the interest rate measures taken by his predecessor to defend the rupee. Rajan must give a further push to growth to keep the momentum and positive sentiment alive.
Today, it is not clear what the RBI is targeting — inflation or the rupee. Inflation remains a difficult problem. While manufacturing inflation has fallen, food inflation remains high. India is now seeing a sustained increase in food inflation, especially in non-cereals. The necessary adjustment for non-cereals won't happen as long as government food policy remains pro-cereal. This policy needs to change for food inflation to come under control. For the rest, monetary policy should be eased, as core inflation is low and the potential output gap is large. Even with a high weight on inflation and a lower weight on employment, a Taylor rule says that current levels of interest rates are too high. The RBI needs to note that while it must target the consumer price index, it will find it hard to do so until it solves the question of whether monetary policy affects food prices, or whether inflation targeting involves a policy of manufacturing price deflation.
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