Though the usual imponderablesEl Nino, action on MSP, fiscal deficitremain as they do at the time of any policy, the central bank did well to extend a hand to the new government which is trying to revive growth while keeping a lid on inflation. In sharp contrast to earlier RBI communicationsat the time of Governor Duvvuri Subbarao and finance minister P Chidambaram for instancethis time around, RBI has taken the governments stated intentions/manifesto-promises on board and gone and announced a relatively dovish statement of policy intent. RBI has not cut policy rates, but it has eased liquidity by cutting the SLR 50 bps and, more important, signalled room for a rate cut a few months down the line if disinflation, adjusting for base effects, is faster than currently anticipated. That doesnt necessarily mean rates will be cutindeed, the adjusting for base effects means just the expected June to November fall in inflation due to just the base effect wont be taken into account. But since RBI talks of the possibility of stronger government action on food supply, this means it is confident the government will dump wheat and rice stocks from FCI to kill foodgrains inflation; RBI seems to be more sure about better fiscal consolidation this time around, something finance minister Arun Jaitley has talked about.
Steps on increasing the foreign exchange Indians can take out under the Liberalised Remittance Scheme are welcome, and expected given the inflow of dollars, though a cautious RBI has still not gone all the way back to the earlier $200,000 per year and kept the new limit at $125,000. Cutting back on export credit and moving the money to the more general lending window is also a step towards less fractured credit markets.
Given the slow growth for the third year running, especially the collapse in FY14 ex-agriculture GDPmanufacturing contracted on top of stagnant FY13 numbera convincing case could certainly have been made for a rate cut. More so since, at 5.9% for FY14, headline WPI inflation is well within RBIs comfort zone. Given the low levels of capacity utilisation that you see in the RBI surveys regularly, it is a fair bet that manufacturing inflation is not going to be rising in any serious manner. In even the case of CPI, though core inflation levels remain relatively sticky, the worst seems to be over. At 8.6% in April, headline CPI inflation is off its