Pressing the interest rate button? Wait for a day.

 

Will the RBI again pause the Rates?

Subbarao, the past Governor of the tumultuous times, authored a book on ‘Who moved my Interest Rates?’ Will the present Governor Shaktikant, acclaimed as the best central bank governor while the other central banks are still in uncertain policies, author another book ‘Who paused my interest Rates? Really, a big question mark. Can inflation be hounded by the RBI or for that matter any central bank in the world? The day of reckoning is tomorrow.

I am reminded of my childhood days when my father got my chappals (footwear) resoled with less cost than a new one and it used to last for one more cycle of use. Restitch the saree to make frocks for the daughters when the head of the household gets tired of using the saree for more than four or five occasions. How can the lady go to functions with the same saree?

European Commission 2008 quoted in a World Bank blog of 19^th September 2022 mentions: “national authorities must pay attention to measures that can facilitate the recovery of the so-called secondary raw materials or end-of-waste materials” arguing for a circular economy. https://blogs.worldbank.org/allaboutfinance/inflation-and-ecological-transition-european-perspective-part-ii?CID=WBW_AL_BlogNotification_EN_EXT

Is growth complacency driving this aspirational $5trillion economy? Is inflation in a growing economy an imperative? Should the RBI Monetary Policy Committee stick to the boundaries of inflation +/- 2 percent of 4 percent? Next quarter, are we going to see the soaring prices of tomato ketchup, tomato sauce, tomato soup and other processed foods using tomato base, touch the roof? Should the RBI see the warning signals more clearly?

Five states are bound for elections in the next few months and are in a mood of competitive populism. Once the schedule is out of the Election Commission  pigeon, several incentives directed to engage the voters have to halt. Make hay while the Sun shines. States within the FRBM norms hasten to implement their agenda pre-election.

GoI is comfortable with its GST earnings month after month. It cares little for whatever the economists say on federal relations and implementation of the recommendations of the Fifteenth Finance Commission. Consumption of durable goods is on the rise. With the festive season ahead, markets are preparing to stock as much as possible from the rural markets that are buzzing with economic activity. Farmers are increasingly adopting latest technologies aided by solid support from a few states like Telangana.

Crorepatis increased and even a tomato farmer of Karnataka, a press report says, bought a car worth Rs.45lakhs within a month’s sale of this crop. But the poor who are still around 240mn and the lower middle class are unable to make both ends meet. They seem to be toying with the idea of recycling the useable instead of replacing their old TV or nearly worn out durables with the new ones.

Can tomatoes and onions be recycled? My wife says: Tomatoes, if bought when cheap, can be sliced and kept in the deep fridge to last for more than six months. Pull them off, wash them with water at room temperature, they can be used as good as fresh tomato slices. But onions, by nature are more durable but storing them in a fridge stinks. There is no way to recycle. Prices of many vegetables soaring beyond the common man’s pocket at the moment can neither be stored nor recycled.

The latest buzz word in the US is super core inflation and James Powell argued for unemployment as a solution, ludicrously. Efficacy of inflation targeting remained an uneasy solution to the rising prices of all daily consumables.

An interesting discussion in OECD Economic Outlook Vol. 22 of 2022 highlights the current difficulties in targeting inflation post pandemic as both supply and demand factors pushed the inflation.

A S&P Rating Agency’s recent report says that the days for low interest rates and easy credit in Asia-Pacific markets are ending. India is largely demand-driven economy and the recent service sector PMI hovering above 65 is a strong evidence. PMI manufacturing is steady at 57.7 in July 2023.

Politics of economic growth in India cannot afford the luxury of inflation pushed either through hiking the interest rates or a dominating fiscal policy. Will these considerations bat for a pause in the interest rates or reduce by a tad, to please the tomato buyer by 10 to 20 basis points?

*The author is an economist and risk management specialist.