Two data sets released by the government yesterday indicate a sharp rise in India's retail inflation in November and the slowing down of industrial production. What does it mean for Indian economy? Was it expected? In an interview with Business Today, N R Bhanumurthy, a professor at National Institute of Public Finance and Policy, New Delhi, gives you the answers:
Retail inflation has risen 15 month high to 4.88 % in November. India's factory output, as measured by the Index of Industrial Production has slowed down to 2.2% in October. Are we sensing a macro-economic crisis?
One month's data cannot be a crisis. What one should read from the data is that the policy to contain inflation needs to be maintained in a consistent basis.
You mean Reserve Bank of India (RBI)'s policy stance?
RBI has been doing its job. Unfortunately they are being criticized. Let inflation tackling job be left to the monetary policy committee (MPC).
Which means one should not expect further interest rate cut?
The question everyone is asking today is whether there will be any further cut in interest rates. I think, more or less, the answer for that is no. My guess is that the downward movement in interest rate cycle is over. We only expect interest rates to go up, if not now, by the middle of the next financial year.
Why is it so?
It is not necessarily because of the domestic growth concerns, but largely due to open economy macro issues.
You mean rise in crude oil prices?
Not only that. It is more to do with international commodity prices, the oil price movement and the international monetary policy movement. These things might determine the future interest rate trajectory and not by the domestic macro-economic conditions. I think that is one of the reasons why in the October policy, one of the MPC members who is from RBI voted for hike in interest rate. He was criticized for that. Overall I think, we will be targeting an inflation level of 4 % to 5 % and a downward movement of interest rate may not be possible.
GST implementation has not contributed to inflation?
Inflation expectations, as I told you may not be due to GST, but due to global developments, the commodity price increase and particularly US monetary policy.
How can US monetary policy impact Indian retail prices?
As I said, open economy macro-economic issues will transmit through capital inflow, which has an impact on money supply and then in the second round money supply has an impact on prices. My guess is that RBI must be watching US policy movements very carefully and at the same global commodity prices.
You mean to suggest that RBI, by not tinkering with interest rates, was expecting this increase in inflation level?
RBI has been saying that there is inflation expectation, but I don't think even they would have expected it to touch 4.9%. They would have expected firming up of prices, but not necessarily this much. All I can say is that it has been consistent with RBI's approach on inflation expectations.
Industrial production is slowing; inflation is increasing, what should be the government's response?
Government has been doing its job. It has been cutting taxes which should have brought down inflation level. They can keep tinkering on the taxes side, including GST rates. You may not realize, but the government has already given a stimulus of nearly Rs 50,000 crore. We always feel stimulus means increase in expenditure, but not necessary, you can reduce the taxes also. India has already done that through the revenue forgone in reduction in crude oil taxes as well as reduction in the GST rates. These two policy measures together would account for a tax revenue forgone to about Rs 45,000 crore to Rs 50,000 crore. That's the estimate. In my view, that is a huge stimulus and that has brought down the inflation to some extent. Otherwise it would have crossed 5% now.