Special Report

Economy leaves worst behind

Economy leaves worst behind

FPJ : It is unlikely that the monetary policy committee of the Reserve Bank of India will change the rate when it reassembles for its bimonthly meeting this week. All economic indicators point to the maintenance of the status quo. In its October meeting the rate was left unchanged, though in the previous two meetings in June and August it was revised upwards. The confidence to retain the current rate would stem from the fortuitous turn in the global oil markets.

At its last meeting in October, the MPC was concerned with the relentless rise in the price of crude oil and the resulting depletion of the value of the currency. Crude oil ruled at nearly $85 a barrel while the rupee had slumped to about 75 a dollar. This was a scary scenario for a government which had had the immense good fortune of benefiting from a benign global oil price regime till then. Both the fisc and the rupee seemed to be under pressure in what was the beginning of the election year.

But as suddenly as it had begun, the global oil market underwent a sea change on the back of a relatively lower global growth prospects and the on-going US-China trade wars. Easing of the global oil prices, though these have seen a small uptick in the last few days, have had a salutary effect on the value of the rupee as well. With crude oil now ruling below $ 60 a barrel, the rupee has staged a smart recovery, from the high of nearly 75 to a dollar, it now rules below 70 to a dollar.

This should generate confidence among all economic actors. It is, therefore, most unlikely that the experts who sit on the MPC would upset the current equilibrium by tinkering with the rate. It is so also because consumer inflation is at a very comfortable level of a little over three per cent while non-food, non-oil inflation had creeped up to nearly six per cent following the spurt in the global oil prices. Even the latter should register an appreciable fall once the impact of the lower oil prices and stronger currency gets factored in.

RBI’s clear remit is that it should try and contain consumer inflation at about four per cent with a plus or minus margin of two per cent. It is well within that government-set parameter. Indeed, the RBI policy-makers have other positive developments to factor in such as the yields on bonds and other financial instruments which have come down following the reduction of stress on crude oil and the rupees.

A far more positive development which should spread cheer among all investors, domestic and foreign, is the handsome growth in year-on-year credit disbursals. Banks registered a growth of 14.9 per cent till early last month as against 8.3 in the same period last year. In percentage terms, investment rose nearly 32 per cent in the first half of the current fiscal as against 30.9 per cent in the corresponding period last year.

Empirical evidence supports these indices with most economic actors exuding hope that the negative impact of the notebandi and the disruptive implementation of the GST are finally behind us. However, due to lower yields for farm produce and a continuing crisis in the mining sector following the unwise blanket cancellation of fresh coal licenses, the growth rate declined to 7.1 per cent in the September quarter as against 8.2 per cent in the first quarter of 2018-19. Slow growth in the urban market for two-wheelers and cars has the dealers and manufactures worried.

Partly the auto sector slowdown might reflect the high interest rate regime put in place by the central bank to try and rein in inflation and partly it may reflect the growing digitisation of the economy with the taxmen keeping a hawk-eyed watch on cash transactions. Another key input when the wise men of the MPC deliberate the policy rate would be the stressed fisc, with the government reaching the whole year deficit target in mere seven months.

Finance Minister Arun Jaitley is confident of staying close to the target at the end of the financial year, but the intervening parliamentary poll might well force his hand unless he is careful. Or there is help from the RBI and other contributors of cash in the public sector which can transfer a greater than usual share of dividends and bonuses to the exchequer. However, the overall economic situation is turning for the better. And this should boost the sentiment all around.



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