Now that food prices are softening, do you think they will remain elevated still or do you think this is a temporary relief, a trend perhaps that could sustain? Which one of these do you think it is?
Devendra Pant: There will be a relief because generally what happens is when you are entering the winter season, you see the kind of price movement in the vegetables or the fruits, they tend to ease because what happens is either you have the less rainfall or more rainfall and because of that there are some supply shortages. We have seen that historically food inflation cools off. But there are two commodities which could be another source of problem for food inflation in general and your overall inflation in particular, which is building up and which had deflation till August. On August 24, oil and fats had a deflation of 0.86% and come November it has an inflation of 13.28%. So, this is one commodity among the food group which can create a problem in the months to come.
Do you think this kind of data could see the RBI moving towards the 25 basis points rate cut in February under the new governor?
Devendra Pant: It will be very difficult because there will be some more data. During the monetary policy, I had said that February is not given. No doubt, between December and February RBI will get more information. One information is out. We had this month’s IIP and CPI numbers. In January, we will have the December inflation number before the monetary policy committee meeting takes place and another important factor will be your union budget, its fiscal arithmetic.
Now what happens is the RBI has given the projection of the inflation hitting 4% in the second quarter of next fiscal year and by next monetary policy meeting, we will have one more quarter of forecast by the RBI. Now, there are signals that inflation is going to remain around 4%, there may be cuts, but if the indicator and the evolving global and domestic macro scenario or economic scenario is such that it is going to remain above 4%, maybe we have to wait. But it is more data dependent rather than anything else.The RBI is trying to balance its medium-term inflation target of 4% and their need is to keep economic growth alive and kicking. Does the push need to come more from the RBI’s monetary policy or the government’s fiscal measures that we might see in the budget?
Devendra Pant: We often argue that interest rates should be low for the consumption demand and investment demand to grow. Now, let us first take your investment. For investment, A) what matters is the real interest rate; and B) A low real interest rate is a necessary, but not a sufficient condition for the investment demand to kick in or investment to grow.
What matters more for the investment is demand growth. If demand growth is there, we see investment at a relatively higher real interest rate. Now let us come to consumption. In consumption, what matters most is leverage consumption. It is not a very big factor or not a larger proportion of the consumption. Limited people get it. It is not that everybody gets a loan for consumption. So again, in consumption, what matters more is real wage growth. Is the real wage growth of the people or the consumer in the positive territory or not? The moment they remain there, you will see the consumption growth taking place and you may have heard me say again and again, that inflation was, is, and will always remain the key risk for any economy.
