When CPI and IIP numbers came out this week, all hopes for a rate cut by the RBI in the upcoming policy meeting faded. Taking a cue from across the world, the market was expecting a rate cut by the RBI, a prayer that would have been answered had the numbers supported. Knowing Raghuram Rajan, as an ardent opponent of cheap money, it is unlikely he will give in to the temptations of cheap money.
Just when the scenario seemed to look a bit better, crucial numbers that maps the economic health delivered a severe jolt. The CPI for October showed surprise elevation to double digit. As if it was not enough, the IIP numbers for September came in at much lower than expected 2 per cent. The trend clearly shows that while production continues to be sluggish, inflation does not show any sign of giving up. In such scenario, policy-makers at RBI will find it tough to lower interest rates - a demand (or a necessity, as a few experts suggest) that has gone unfulfilled for considerable time now.
Pundits from conventional school of thought are likely to stick to tightening the screws on economy if inflation does not agree to behave. It may be pertinent to explore why popular sentiments would call in for policies that are completely opposite to conventional ones. A plausible reason may be in the truth that conventional handles are not working as expected. RBI, in its capacity, has taken rights steps aimed at steering the economy in comfort zone but results have not been comfortable. May be, the problem exists elsewhere.
RBI governor Rajan had argued against low interest regime primarily because it tends to fuel asset prices. Evidently, it is because cheap money is likely to find its way for leveragingpurposes instead of getting deployed in the areas of higherproductivity. low interest regime, in the conventional monetary parlance, is aimed at repairing markets to changing prices and inflationary expectations. New money created as a result should ideally be used to promote investment in productive avenues, which shows up in form of additional jobs in the economy. It is obviously a low risk proposition since distribution of money tends to cover a wider ground.
Innovative solutions adapted so far have thrown conventional monetary policies out of fashion. In fact, the world moved very fast ever since the 2008 global meltdown. The Quantitative Easing (QE) programme installed after the meltdown was a genius stroke to generate more money when interest rates could not go below zero. It was expected, conventionally, that new money would pep up money circulation in the system bringing about positive economic changes. Nothing of that sort happened. Cheap money floated as a result did not circulate back in the economy in form of new jobs and businesses. In fact, during this period, there were hardly any new jobs created, as there was no real incentive in creating one. Most of it was leveraged resulting in burgeoning asset prices across the world. It did result in higher notional risk in the economy.
The noise for cheap money in growing louder in India, not surprisingly, since the rich part of the world seems to be enjoying the feast on the newfound innovation. However, we can expect Rajan to be very cautious in his approach. Going by what he had predicted back in 2005, which came true later in 2008 in form of global meltdown, he is unlikely to give in. His moves are strategic because by not making Rupee cheaper, he is in fact protecting the assets of the country. As it is, there are no guarantees that bringing the rates down will result in corresponding growth, just as it did not for US. By sticking to his guns, he is ensuring India does not enter into high-risk zone. Till the weather clears, it may be painful for us. But, who said protecting your turf had ever been easy.
(The writer is Director, InvestCare, leading wealth advisors. You can reach him at samar.vijay@investcare.in)