The Difficulty of Being Shaktikanta Das - Vivek Kaul's Diary
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The Difficulty of Being Shaktikanta Das

Jan 15, 2019

Vivek Kaul

The inflation as measured by the consumer price index (CPI) fell to 2.19% in December 2018. This was the lowest in 18 months. Inflation is essentially the rate at which prices rise. The big question here is that will the monetary policy committee of the Reserve Bank of India (RBI) cut the repo rate when it meets next month. The repo rate is the interest rate at which the RBI lends to banks and has an influence on the interest rate scenario in general. It currently stands at 6.5%.

Let's look at the issue pointwise.

1) A major reason for the fall in inflation as measured by the CPI, lies in the fact that food inflation is in negative territory i.e. when it comes to overall food prices, they have been falling. Food inflation in December 2018 stood at -2.51%. The interesting thing is that food makes up for 39.06% of the overall CPI basket (or the products and services which are used to measure inflation). When it comes to rural India, food makes up for 47.25% of the overall basket and hence, is a very important part of the rural consumption basket.

2) The fact that food prices are falling is one sign of agriculture distress. Let's look at some key products that make up for the food basket. Fruits prices in December 2018 were down 1.41%. Vegetables prices were down 16.14%. The price of pulses was down 7.13% and has been falling for the past 25 months. Sugar prices were down 9.22% and have been going down for the past 11 months.

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3) With inflation being at 2.19%, the real interest rate, or the difference between the repo rate and the rate of inflation, is at 4.31% (6.5% minus 2.19%). This is the third highest the real interest has been in the last five years. On the past occasions when the real interest rate was higher than 4.31%, it was followed by a repo rate cut immediately. In November 2014, the real interest rate was at 4.73% and the repo rate was at 8%. In January 2015, the repo rate was cut by 25 basis points to 7.75%. One basis point in one hundredth of a percentage.

In June 2017, the real interest rate was at 4.79%, and the repo rate was at 6.25%. In August, it was cut was by 25 basis points to 6%.

Will the RBI do something similar this time around?

4) In December 2014, the food inflation was at 1.13%. In June 2017, it was at -2.12%. The RBI has next to no control over food inflation. Despite, food inflation being very low, the central bank decided to cut the repo rate on the two occasions that we just discussed.

5) Let's look at core inflation, which is basically CPI inflation stripped for food and fuel products, in Figure 1.

Figure 1: All Fall Down? Not Really.

The core inflation has been around 5% for the last four years and which explains why even though overall inflation is low, it doesn't feel like that. In fact, in December 2018, the core inflation was at 5.64%, one of the higher figures in the last four years. In this scenario, will the RBI monetary policy committee get around to cutting the repo rate, is a question well worth asking.

6) While food prices have been falling, the same cannot be said of many other items that constitute the CPI basket. Housing prices went by 5.32% in December 2018. Health costs went up by 9.02%. Education costs went up by 8.38%. Recreation and amusement costs went up by 6.05%. The moment we look at items beyond food, inflation is well and truly there. Of course, as income levels rise, the proportion of income that a household spends on food comes down. The other items tend to become more important.

7) All this also puts the new RBI governor Shaktikanta Das in a tricky position. It would be interesting to know how he views the situation. If his view is that the repo rate should be cut, then he will be accused of batting for the government, a tag he should try and get rid of, if he wants the market in general to take him seriously. If his view is that the repo rate should not be cut, then the government, which has high hopes from him, won't like it. Let's see what happens next month. Watch this space.


Vivek Kaul
Vivek Kaul
Editor, Vivek Kaul Publishing

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Vivek Kaul is the Editor of the Diary. He is the author of the Easy Money trilogy. The books were bestsellers on Amazon. His latest book is India's Big Government - The Intrusive State and How It is Hurting Us.

Disclaimer: The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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2 Responses to "The Difficulty of Being Shaktikanta Das"


Jan 21, 2019

Shaktikanto Das has been brought in so that the government gets its hands over RBI's reserves.


Nayan Kamat

Jan 16, 2019

The RBI Governor should be doing what is right for the economy as per its mandate and not what the government wants or what Vivek Kaul wants him to do. The basic costs of living are composed of food, rental/housing & fuel & transportation. If the food inflation is down and so are fuel prices what is keeping the rental/housing & transportation costs high ? And is food inflation going down a bad thing ? You have linked this to Agarian Crisis ? Can you please explain the economics ?

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