First, it should be noted that RBI’s rate cut has come immediately after latest wholesale price index (WPI) figures were released. Although RBI takes consumer price index (CPI) as its preferred measure for inflation, the falling WPI is a major factor to reckon with.

Detailed figures show no manufacturing sector is showing more than 2per cent inflation rate, excepting paper and wood and wood products groups. A two per cent inflation rate is the inflation target for advanced countries like EU, USA or Japan. For some sectors prices are falling. Metals prices for instance are showing falling trends. Some chemicals and transport sector are showing zero inflation rate. This is not just in the last few months, but these trends are continuing for a long time now.

WPI figures show that manufactured goods inflation is mostly negative – which is not good for a growing economy like India. Stagnant or falling prices cannot nurture an industrial sector. This showed that the restrictive monetary policy had taken hold and biting the industrial economy. Figures relating to the performance of the industrial sector also vindicated this state of affairs.

Last IIP also showed little activity in the industrial economy, with growth rate at 3.8per cent. When India was growing at its fastest, 8per cent-9per cent, the industrial sector was clocking a growth rate of above 10per cent. It had touched 12per cent growth in the fastest growing patch. If the Indian economy was to regain that pace, it was clear that the industry should grow in double digit clip. RBI could no longer have ignored the WPI trends and what these were showing. Some action was imperative.

Secondly, although overall CPI figure for December showed 5per cent inflation rate, excepting for fruits, vegetables and milk, all other sectors are showing less than 5per cent inflation rate. The CPI index was in affect averaging out the very low inflation rate in most food articles, Only the handful that were rising fast like vegetables, fruits or milk, were pushing up the overall rate. And even then RBI inflation target is 6per cent by early next year. Thus, going by even the CPI measure, the present inflation rate was not uncomfortable for RBI to let its rein a little loose.

Thirdly, at the current levels, the gap between CPI and WPI is widening and core inflation is virtually negative. If anything, manufactured goods inflation should rise to encourage growth. That is, demand for manufactured goods should be encouraged. And how do you do it than by cutting down interest rates a bit.

Take for instance, the IIP figures for consumer goods and consumer durables. The IIP shows these are in deep contraction. Both these sectors are showing negative growth and for some time now. Consumer durables demand is particularly interest sensitive. With consumer financing being the mode for purchase by average households of high value durable items, a hike in interest rates or continuing high interest charges is the surest way of choking off demand. Now that these industries and sector are not growing, the best time is now for a cut in rates to push demand.

Thus in taking this step for a cut in interest rate, although minimal, RBI has sent out a signal that it wants to return to a positive territory where it wants growth to get more consideration than only inflation control. In this case, RBI is parting company from its other emerging market counterparts. Both Russia and Brazil have recently raised interest rates heftily to curb inflation, attract funds from overseas and stabilise their currencies. Fortunately, for RBI, the tasks are otherwise. It does not have to exactly worry for the rupee’s exchange rate now as the rupee has strengthened recently. It does not have to work for attracting funds from overseas as the government is doing that job effectively and funds are flowing into the country. Now its primary job – inflation control—is somewhat won at least for the time being.

And this takes us to the broad macro-economic environment which is also turning favourable for fiscal deficit with oil price sliding. The halving of crude oil price means that India’s current account deficit could become manageable and this should not pose to much pressure on macro management. We had seen how oil price rise could bring about a major change in the country’s external balances. The RBI estimates that with the fall in oil price, India should be able to save $50 billion to $60 billion outgo on oil imports.

The falling oil import costs should clash the centre’s subsidy burden and help recovering the fiscal balance. The budget this year looks forward to a fiscal deficit of 4.1per cent of GDP. With fuel subsidy burden going down, the figure looks approachable. Even if there is some slippage in fiscal deficit target this financial year, it should be so much easier to stick to fiscal consolidation path next year.

If growth could not be given a nudge in these circumstances, when should it be done. It is welcome that RBI has come out of its cautious mode and voted in favour of growth by starting a resetting process. The economy needs RBI best wishes and some good actions too. (IPA Service)