An Outlook on India Credit Policy

RBI Credit policy has been announced and it has revised the inflation targets upwards from 5% to 6.5% for FY10. RBI has said that it will ‘watch inflation like a hawk’. This clearly means that RBI is concerned about the spiralling prices and this could be the prime issue which would dictate the policy decisions in the coming months.

Apart from that, the RBI Monetary Policy was just another non-event.Interest rates were kept unchanged.Major announcement could be summarized as below:-

1. CRR was unchanged at 5%.

2. Repo rates unchanged at 4.75%.

3. Reverse repo rates unchanged at 3.25%.

4. SLR rate was hiked to 25% from 24% and this, the RBI says would not affect liquidity.

5. FY10 GDP forecast has been kept unchanged at 6% for FY10 with upward bias.

And at the same time, the policy has said that it expects to see a modest decline in agriculture. The RBI does not seem to be overtly worried about the decline in agri growth as it is feels this fall is seasonal and once the monsoons, hopefully, improves in the next year, things would fall back in place. It expects robust growth in industrial sector to more than make up for the decline in agri and that, RBI hopes, would keep the GDP buoyant.

RBI is also equally worried about the present situation of liquidity. And knowing this, it has pointed out that there is enough evidence pointing to excess liquidity feeding into asset prices. FY10 money supply growth projection has also been lowered to 17%.

Loans to real estate companies are to become more expensive as realty provisions have been hiked to 1% from 0.4%. The immediate fallout of this would be that some developers who are already having a huge interest cost would now have to pay more. This would mean, costs for realty companies would go up and in all probability, developers would pass on this cost to the consumers, meaning realty prices would go up.NPA norms for banks have been tightened, which is expected as always.

Collateral borrowings are to now attract CRR. So this is more like a back door entry of the hike in CRR which seems like a surety in Jan 2010, or even before that.

Indian Markets Reaction to the Policy

Markets were down 110 points just few minutes before the RBI Monetary Policy came in. And it continued to remain in the red, with realty companies slipping fast. Though a non-event, the market is now worried about the hawkish stance taken by RBI. It clearly sends out the signal that in the coming months, when the next policy is out in January 2010 or even before that, screws will get tightened.

Calculation Of Inflation Figure in India

Weekly inflation figure is a big joke.

The rate which was given by the Govt and the actual rates which a man on the street had, had no co-relation. Inflation is currently at below one percent but we are paying over Rs.100 for a kilo of toor dal. And though we all in the media and economists have been screaming themselves hoarse, urging the Govt to relook at the way in which it was looking at inflation, unfortunately, which till two days ago, fell on deaf ears. But finally some noise seems to have reached and the Govt has actually changed the way we calculate inflation. Yet, the sad part is that this new change would in no way once again reflect the true picture.

Amendments made for Calculation of Inflation Figures

Inflation for the week ended October 3, 2009, was 0.92%. And inorder to present a better relfection of the reality, the Cabinet Committee on Economic Affairs approved the proposal to release inflation data on a monthly basis. The base prices for calculation of inflation would be those in 2004 as against the earlier comparison with 1993 prices. The government will now release two sets of inflation data, one is the weekly data which will have primary articles and fuel items and the second one would be more comprehensive on a monthly basis.

Why did this sudden light dawn on the Govt?

Weekly figures were not giving a true picture of the change in prices, especially from the manufacturing sector. But once the Govt goes with a monthly calculation, there would be a much better reflection of the correct picture. One month is a good enough time to take into account price changes over various sectors and that in the real sense, would give a more correct picture of inflation.

The decision to change the base year to 2004 is also a good one as it is considered to be a more stable year, with respect to economic activities like production, trade and their prices. This 2004 base year will ensure more consistency. The monthly data and 2004 as base year is good but what would be a more apt reflection of the true prices would be a change in the weightage of goods on the Wholesale Price Index (WPI). This, the Govt says would also be changed and we will have to wait till November.

India is probably amongst the very few countries in the world which uses the Wholesale Price Index (WPI) to calculate inflation while all the developed countries use the Consumer Price Index (CPI).

WPI METHOD

WPI was used a method of calculation way back in 1902 and we have shrugged off most of the old ways of life, but this continues. In WPI, a total of 435 commodities data on price level is tracked and of this over 100 commodities have no relevance when it comes to giving an indication of price levels. The last time, the WPI was updated to ‘current’ times was in 1993-94. In the computation of WPI, the 3 major variables are Primary articles, fuel, power, light and lubricants and manufactured products. The receipt of input on weekly prices in manufactured products is very low. Services form no part of the WPI at all though its share in the calculation of GDP is over 50%.

Why can’t we shift to CPI like the rest of the world?

CPI tracks the prices of a specified basket of consumer goods and services. It is calculated by taking price changes for each item in the predetermined basket of goods and averaging them. In India, CPI is calculated on a monthly basis while WPI is on a weekly basis. CPI, as the name suggests indicates price which is a consumer is paying while WPI is about the wholesale prices and there is always a huge variance between the two. So how can wholesale prices be an indication of what the layman on the road is paying?

Conclusion –

we will get a new set of inflation rate but once again it may not be a 100% reflection of the picture on the ground.