US Fed’s message signals ushering of a lower policy rate regime
By Anjan Roy
The US Federal Reserve chairman, Jerome Powell, has given a clear message from Jackson Hole, Wyoming, that the American central bank is all set to enter a rate reversal cycle. The Federal Reserve at long last would usher in a regime of lower policy rates.
This was picked up immediately by the financial markets and the US stock markets have risen once again, after a slide in recent days. One can expect that once the Federal Reserve initiates its policy reversal, the financial markets would further start adjusting.
When the US Fed speaks up, the world’s other central bankers have to listen. This is because the markets would enter a new phase of dynamism. No doubt that the Reserve Bank of India would raise its antenna and look for the changes in the Indian markets.
One can expect that in sync with the global markets, the Indian stocks would also rise as happens when the broad spectrum interest rates are lowered. The stocks markets should show further upsurge in the coming days. Along with that, the bonds markets would also seek fresh levels. One can also expect money to flow from the overseas markets to advantage of the surge.
Against this background, how should the Reserve Bank reset its broader policy measures? Obviously, the guiding factors should be the overall price stability in India as well as the growth potential and performance of the Indian economy.
In its last monetary policy committee review meetings between August 6 and 8, the PC decided to hold its policy parameters unchanged. The policy rate was left untouched, though two of the committee members strongly argued against the decision, according to the latest release of the proceedings of the committee.
The factors that should weigh in for the RBI are the inflation trends and the potential for a pick up in price trends. The prices have shown sober trends in the last few months. In the latest monthly economic report released by the union finance ministry, this week showed a fairly comfortable picture.
Overall, retail inflation slowed to 4.6% in the first four months of the current financial year April to July 2024, against 5.3% in the same period last year. More specifically, month-to-month July showed a sharp deceleration in prices.
“Retail inflation based on Consumer Price Index-Combined (CPI-C) eased from 5.1 per cent in June 2024 to 3.5 per cent in July 2024, the lowest since September 2019.” The finance ministry ascribed this to a significant fall in food inflation.
Food inflation “declined to 5.4 per cent in July 2024 from 9.4 per cent in June 2024. The substantial fall witnessed in food inflation was helped majorly by a decline in vegetable inflation from 29.3 per cent in June 2024 to 6.8 per cent in July 2024.” However, this runs counter to the anecdote price levels in markets around the country, particularly the prices of vegetables.
Now the question is whether this price moderation is transitory or a poster to a longer trend.
If this sudden monthly drop is reversed in the short run, then the RBI should not budge from its anti-inflationary stance. If otherwise, and the prices seek lower levels then there is room for the RBI to reset its policy rates. As of now, it is difficult to really look through the haze and predict how the prices should trend in the coming months.
Two considerations are important in any such assessment. First, the historical trends. It has been generally seen the food prices, particularly, those of the principal two cereals and fruits and vegetables, tend to rise in the summer months through the monsoon periods. These then drop in the post-harvest season from October onwards. Going by experience, maybe, we are over the price hump and the trends in the coming months should become more and more comfortable, barring unforeseen bumps. The other favourable factor is that the monsoon is progressing well and the prognostication is that it should remain at the normal levels this year.
Hence, the fears of a bad monsoon and a possible hit to food production could be cast aside this season. The price situation, particularly, food inflation could remain stable for now.
Finance ministry sums it up thus: “With moderate core inflation and positive progress in monsoon, the headline inflation outlook is positive. Assuming a normal monsoon, CPI inflation for FY25 is projected at 4.5 per cent by the RBI, with Q2 inflation at 4.4 per cent.”
On the other hand, the finance ministry’s monthly report takes note of the adverse consumer expectations in the midst of the otherwise favourable economic data.
The finance ministry notes that amidst “favourable developments, consumer confidence in the current economic situation, employment, price level, and income has declined, as reflected in the Current Situation Index of the RBI’s Consumer Confidence Survey. Households’ optimism about economic conditions for the year ahead has declined from the previous survey round.”
Further, “lower optimism on the general economic situation, employment and prices led to a moderation in the future expectations index of the Consumer Confidence Survey.”
Typically, economic models give a major importance to the consumer’s inflation expectation as a guiding indicator for future inflation. Once inflationary expectations get anchored, then the future course of prices are influenced by this.
Look at the apparent contradiction. The consumers and the basic economic units are pessimistic about the future, though gauging the present situation it is not bad. How come this contrarian evaluation. ?
Maybe, the people do not have enough confidence in the governance structures. It is a lack of confidence in those who are in the drivers’ seat. But, then, consider the Reserve Bank’s problem in its formulation of policy. It is facing a “riddle”. Introduce an accommodative policy stance and you stoke the inflationary fire, but if you don’t you miss an opportunity to let growth go in its full steam. (IPA Service)