6 DECEMBER 2018
A valid pause
While holding rates, the RBI has wisely stuck to its policy stance of ‘calibrated tightening
The Reserve Bank of India’s decision to leave interest rates unchanged, given easing inflation and the slowdown in economic momentum, was both expected and reasonable. In fact, the RBI was prompted to sharply lower its projection for price gains after an unexpected softening in food inflation and a collapse in oil prices in a surprisingly short span of time — the price of India’s crude basket tumbled almost 30% to below $60 by end-November from $85 in early October. The monetary policy committee (MPC) now estimates retail inflation in the second half of the fiscal year to slow to 2.7%-3.2%, at least 120 basis points lower than its October forecast of 3.9%-4.5%. And it foresees the softness in prices enduring through the April-September half of next year, when headline inflation is projected to hover around its medium-term target of 4% and register in a 3.8%-4.2% range. The MPC’s decision to stand pat on rates must also have been bolstered by the findings in the RBI’s November survey of households’ inflation expectations: the outlook for price gains, three months ahead, softened by 40 basis points from September. On growth, the monetary authority has largely stuck with its prognosis from October, while flagging both external and domestic risks to momentum as well as the likely sources of tailwinds. Among the positives cited, beyond a likely boost to consumption demand and corporate earnings from softer fuel costs, are two key data points from the RBI’s own surveys. Capacity utilisation rose to 76.1% in Q2, higher than the long-term average of 74.9%. Also, industrial firms reported an improvement in the demand outlook for Q4. Still, the forecast for full-year GDP growth has been retained at 7.4%, on the back of an expected 7.2%-7.3% second-half expansion, with the risks weighted to the downside.
Interestingly, and justifiably so, the RBI has opted to keep the powder dry by sticking to its policy stance of ‘calibrated tightening’. Given that its primary remit is to achieve and preserve price stability, the central bank is wary of the uncertainties that cloud the inflation horizon. For one, with the prices of several food items at “unusually low levels”, the RBI reckons there is the clear and present danger of a sudden reversal, especially in prices of volatile perishable items. Also, the medium-term outlook for crude oil is still quite hazy, with the possibility of a flare-up in geopolitical tensions and any decision by OPEC both likely to impact supplies. Buttressing this reasoning, households’ one-year-ahead inflation expectations remain elevated and unchanged from September. Most significantly, the central bank has once again raised a cautionary signal to governments, both at the Centre and in the States. Fiscal slippages risk impacting the inflation outlook, heightening market volatility and crowding out private investment. Instead, this may be an opportune time to bolster macroeconomic fundamentals through fiscal prudence.
The Taiwan card
Taipei’s fine balance in its relationship with mainland China is coming under stress
The huge gains for the opposition Kuomintang, or the Chinese Nationalist Party, in Taiwan’s local elections may help in gradually improving the island’s ties with mainland China. Equally, the adverse results in some of its strongholds could complicate matters for the ruling Democratic Progressive Party government ahead of the 2020 general elections. President Tsai Ing-wen has stepped down as the party chief, owning moral responsibility for the setback; her re-election bid is in doubt. The pro-independence stance of the DPP is at variance with Beijing’s repeated assertion of its sovereignty over Taiwan, which it insists it is prepared to defend through the use of force. All the same, the Taiwanese government has been equally concerned to not allow the long-standing dispute to escalate to a point of jeopardising the strong trade relations between the two territories. But this delicate balance has turned somewhat more precarious since Donald Trump became President of the United States. Ever since his election, he has sought to leverage Taiwan to pressure China in the U.S.’s ongoing trade war. A first indication was the congratulatory call he received from Ms. Tsai on his poll victory. The episode raised concerns over the status of U.S.-China diplomatic relations, established in 1979, and the consequent downgrading of the U.S.’s ties with Taipei to unofficial exchanges. The 2018 Taiwan Travel Act aims to promote greater engagement between Washington and Taipei. Similarly, the new headquarters of the American Institute in Taiwan in Taipei is symbolic of the shift. The Taiwanese President’s recent visits to the U.S. and interactions with several Congressmen have predictably angered Beijing.
Meanwhile, frictions between the two neighbours have also increased. Taipei has alleged that the recent mayoral elections were marred by Beijing’s meddling, with money funnelled illegally to fund opposition campaigns. Business corporations have come under pressure to take down references to Taiwan as a separate entity. Beijing is believed to be applying overt and covert pressure to stop countries from according diplomatic recognition to Taipei. In an echo of China’s increasing economic clout among developing countries, a number of African and Central American states have withdrawn formal ties with Taipei and established links with Beijing since Ms. Tsai became President. In a referendum coinciding with the polls, the people rejected a proposal to rename the country’s Olympic team as Taiwan, instead of the current Chinese Taipei. The verdict is an indication of the limited support for independence and a greater preference to maintain the status quo. Taiwan stands to gain by staying clear of big power rivalries.