Monetary trap

In a rather concerning economic environment, RBI's Monetary Policy Committee (MPC) is underway to prepare this financial year's second bi-monthly policy. Speculations are strife and investors are greedy. India's nosedive to a 20-quarter-low GDP growth of 5.8 per cent in Q4 of 2018-19 has caused anxiety while official recognition of unemployment sitting at its 45-year lowest has fuelled unrest. As MPC sits to steer India's monetary path for the next few weeks, most experts point towards a dire need for reduced interests – whether in cutting repo rate or increasing liquidity. A prime factor behind India's stagnating GDP growth has been realised in falling consumption expenditure, the prime component contributing to positive GDP. Demonetisation and GST had begun a reverse trend of spending in the economy, which is yet to be normalised, as is evident in consumer behaviour. In this view, experts aggressively support another rate cut by RBI in this monetary policy too, as in the last two policies when RBI had provided a 25 basis point cut in the repo rate. However, whether 25 basis points is enough remains debatable. Given that mean inflation is well within the government's set benchmark of 4 per cent, a greater relaxation could be afforded. Therefore, as most experts agree, a rate cut of either 25 basis points or more (within 50) would be expected. However, another challenge awaits RBI – inflation in food prices. Wholesale price inflation of food grains has shot up sharply from December 2018 to April 2019 – from -0.42 per cent to 7.37 per cent – but it hasn't yet translated to an equal rise in the consumer price inflation, which the RBI takes into consideration. Consumer price inflation, in comparison, has witnessed a meagre change from -2.65 per cent to 1.10 per cent. Recovering from harsh weather conditions, with droughts across parts of Maharashtra and South India along with low rainfall during March-May, food grain prices have shot up sharply in the wholesale market. Further, given that a lower than average monsoon is expected this year, the nascent trend of food prices rising appears to be here to stay. In fact, dairy and horticulture sectors have begun expressing a price rise, with Amul and Mother Dairy increasing costs by Rs 2. Riding on the luck of low inflation, RBI could have toyed with the idea of experimenting with a greater slash in basis points. They still can, but the looming concern of possible inflation will throw some thorns on RBI's path. The global picture today too isn't rosy. The impacts of trade war, fluctuating food and crude oil prices, irregular monsoons and changing geopolitical equations demand RBI intervention. These are closely linked to India's lagging economy which needs a serious push in consumption expenditure to regain track. However, with possible inflation in food prices looming in the background, the idea of increasing liquidity will need deliberation. Whether RBI checks food inflation or sees it as a necessary potion to ameliorate India's dying farm sector will be known on June 6. Meanwhile, RBI could decide to wait for two months and analyse the fiscal budget due next month before providing a momentous change. Nevertheless, the most important decision for this MPC will be to find a path that balances both the lagging economy and a potential farm crisis emanating from growing wholesale price inflation and deteriorating gross value generation.