Mumbai :Investors wrong-footed by the hawkish Reserve Bank of India (RBI) monetary policy meeting minutes might rather want to train their sights on underlying trends in inflation than the volatile headline number, analysts say.
The RBI, which Bloomberg economists Tom Orlik and Justin Jimenez rate among the top 3 central banks that surprise the most, has a mandate to keep headline inflation around 4% in the medium term. But commentary from members of RBI’s rate-setting panel show they are more focused on core inflation — the gauge that strips out volatile food and fuel components.
Globally, focus on core inflation is par for course. But in India’s context, it’s the headline inflation that matters, at least until now.
According to the minutes of the April 4-5 meeting released last week, Deputy Governor Viral Acharya said the headline inflation was being influenced by volatile vegetable prices, which according to him wasn’t amenable to monetary policy actions. His panel colleague, Michael Patra, a noted hawk and head of the RBI’s research department, sought an increase in the repurchase rate, citing the stubborn rise in core inflation to above 5%.
“This volatility is largely ‘noise’ from an interest-rate setting perspective,” said Acharya, who heads the the monetary policy department. What concerns him more is inflation — minus food and fuel — which “one can consider as the ‘signal’ given its persistence.”
The stubborn nature of this inflation gauge along with an optimistic outlook for growth and demand meant Acharya would vote for withdrawal of accommodation in the June policy meeting — news that sent bond yields soaring. That was a far cry from early April, when bond investors interpreted RBI’s lowering of near-term inflation projections as a signal that interest rates would remain on hold for sometime.
“India’s volatile food prices can often obscure the underlying inflationary trends,” said Priyanka Kishore, lead Asia economist at Oxford Economics in Singapore, adding that investors would do better to keep an eye on the consumer price index excluding food, fuel and motor fuels, which is rising.
At the April policy meet, Governor Urjit Patel lowered inflation projections. The RBI is forecasting inflation for April to September at 4.7-5.1%, slower than 5.1-5.6% made only two months back. It expects the second half inflation to ease to 4.4%, having earlier estimated it at 4.5-4.6%.
India’s annual headline inflation slowed for a third straight month in March to 4.28% from 4.44% in February. That masked an upward climb in core inflation making some policy makers uneasy.
With the current easing in inflation likely to prove temporary, the tone of the minutes show the debate is veering toward a possible rate increase — something that economists may need to factor in.
The central bank will probably hold the benchmark repurchase rate at 6% through 2018, according to the median of forecasts by economists surveyed by Bloomberg. They see rates increasing in the second-quarter of next year.
“The debate within the MPC has shifted from ‘hold versus cut’ to ‘hold versus raise’ even though the RBI has cut its near-term inflation forecast,” said Rohan Chinchwadkar, assistant professor of finance at the Indian Institute of Management at Tiruchirappalli in southern India. “One reason is the worry that high core inflation will translate to the headline since low food inflation may not sustain.”
Cabinet clears setting up of centralised GST appellate authority
New Delhi: The Union Cabinet on Wednesday approved setting up of a centralised Appellate Authority for Advance Ruling (AAAR) under the goods and services tax that would decide on cases where there are divergent orders at the state level.
The setting up of a centralised AAAR would require amendments to the GST Acts. The centralised authority as an appellate body will only take up cases wherein the Authority for Advance Ruling (AAR) of two states have passed divergent orders.
The Goods and Services Tax (GST) Council, headed by Finance Minister Arun Jaitley, and comprising state counterparts, in December decided to establish the centralised AAAR.
“The Cabinet has cleared the GST appellate authority,” a source said after the meeting of the Cabinet headed by Prime Minister Narendra Modi.
In view of the confusion created by contradictory rulings given by different AARs on the same or similar issues, the industry had been demanding a centralised appellate authority that could reconcile the contradictory verdicts of different AARs.
Urbanisation to be big driver of Indian economic growth: Kant
Davos: Urbanisation will be a big driver of economic growth in India going forward, supported by favourable macroeconomic factors, accelerated infrastructure building and continuing reforms, NITI Aayog CEO Amitabh Kant said.
Speaking here at an event on sidelines of the World Economic Forum Annual Meeting, he also said the Indian economy may even exceed the IMF growth forecast of 7.5 per cent for the country.
Kant said IMF has forecast 7.5 per cent growth for India despite a gloomy outlook for the global economy and this itself is good, though there are expectations that this estimate would be surpassed. He said India is giving a big push to urbanisation with more than 100 smart cities being developed.
The country is also using technology in a big way to change the way business and governance is done, he added. Besides a massive infrastructure building is happening, bank credit flow has rebounded and macroeconomic factors like inflation and fiscal deficit are also being supportive, Kant said.
DIPP Secretary Ramesh Abhishek noted that states are competing with each other to attract investments and all political parties have adopted the economic reform process. He listed various reform initiatives undertaken in India, including on areas like ease of doing business, FDI, manufacturing and taxation.
They were speaking at Institutional investors’ breakfast roundtable, organised by the industry chamber CII and Kotak Mahindra Bank. Other participants included CII Director General Chandrajit Banerjee and leaders from Indian and foreign companies.
On questions about some persisting issues in doing business including on tax and insolvency related issues, Abhishek said a lot of efforts have been put in to remove all bottlenecks and starting a business doesn’t take more than a day. Besides, special provisions have been made for startups and angel investors, he added.
Kant said efforts are also being made to remove all physical intervention and digitise the entire process of inter-ministerial and inter-department consultations to fast-track the decisions.
India will surpass China, says Raghuram Rajan
Davos: India will eventually surpass China in economic size and will be in a better position to create the infrastructure being promised by the Chinese side in South Asian countries, former RBI Governor Raghuram Rajan said.
Addressing a session on Strategic Outlook for South Asia, Dr Rajan said that the Indian economy would continue to grow while growth rate is slowing down in China.
“Historically, India had a bigger role in the region but China has now grown much bigger than India and has presented itself as a counter-balance to India in the region,” Dr Rajan said at the WEF Annual Meeting 2019.
“India will become bigger than China eventually as China would slow down and India would continue to grow. So India will be in a better position to create the infrastructure in the region which China is promising today. But this competition is good for the region and it will benefit for sure,” he said.
The comments assume significance with China working on a lot of infrastructure projects across the region. In 2017, India became the sixth largest economy with a GDP of $2.59 trillion while China was the second large with a GDP of $12.23 trillion.
At the same session, Nepal PM K.P. Sharma Oli cited collaboration with China as well as India as reasons for the economic growth.
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