Inflation has eased a little. Both food inflation and core inflation have dipped. On the strength of the data and the slowdown, RBI may cut interest rates. But it has to be ensured that inflation comes down. RBI must keep a close eye on the numbers. The current data show the possibility, especially if the rupee stays steady checking prices of tradables. GAAR has been postponed. It will have a stabilizing influence on foreign inflows. As a result, the rupee will stay steady. Core inflation which is measured by non-food, non-oil prices is likely to hold. RBI is more interested in such data than in the volatile food inflation or the administered inflation arising from the fixing of oil prices. RBI is also likely to watch the rupee while making its inflation forecast and taking, monetary policy decisions. Besides, there has been a sharp fall in the financial savings of households. That puts RBI in a dither on cutting rates. If inflation had been higher, it would have been even more difficult for RBI to cut rates as it could reduce the real return to savers. The decline in savings creates a high current account deficit.
Other than inflation and growth, there is a third element. It is the growth of non-food credit. It has declined significantly. Investment slowdown and high interest rates are responsible for the decline in such credit growth. Governance problems add to the crisis. All these factors have to be addressed if credit growth has to accelerate. The government cannot sit tight with just interest rate cuts by RBI. Investment plans and expenditure have to be pushed up. The National Investment Board cannot be expected to do wonders
