By Tarun Kumar G. Singhal
Raman Jokhakar Chartered Accountants
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From the story about the boy who cried wolf, the most commonly drawn lesson is that one should not raise an alarm about an unpleasant eventuality when it is not imminent. It is equally important to bear in mind that the wolf will eventually come, when you are least prepared for it. The US Fed rate lift-off has been like the wolf in the tale. It has not happened on a few past occasions when it could have. This does not mean that it will not happen, perhaps later this year itself. India would do well to use the respite offered by the Fed’s decision to hold its hand for the time being to prepare for when US policy rates will move up from 0-0.25 per cent. The Reserve Bank of India (RBI) cutting its policy rate is just one of those things.
The dollar has dropped against most currencies, after the decision to defer a rate hike. The rupee, too, has strengthened, against the dollar. Which means that it has extended its overvaluation against other major currencies, further hurting exports. This is as good a time as any to nudge the rupee lower. One way to do that is to lower the central bank’s policy rate, which would induce some foreign capital reallocation away from India. If much of the volatile capital leaves India before the Fed lifts rates, there would be little room for any violent impact on the markets. Consumer prices are rising again, if you leave aside the year-on-year figure and look at the sequential movement of the index month to month. This might inhibit the RBI from paring rates. Food price inflation in a year of deficient monsoon cannot be the yardstick for setting monetary policy. The government has been adopting supply-side measures to ease the pain and should do more, to ease the upward pressure on food prices.
The government has to clean up the act when it comes to de-clogging stalled payments to vendors and construction companies for their work done, for itself or for stateowned enterprises. If that happens, new work orders from the Railways and national highways will take off better, and give momentum to the economy in the short run, before the rate hike does make its appearance. Even three little pigs managed to best the wolf.
(Source: Editorial in The Economic Times dated 19-09-2015.)
