ONE of the most worrisome concerns that confront Indian political leaders, especially those from the ruling side, at the time of elections is the fear of high inflation. Several times in the past, parties lost power because of the exorbitant price of commodities.

With general elections due in April-May next year and ongoing assembly elections in five states — Chhattisgarh, Madhya Pradesh, Mizoram, Rajasthan and Telangana — where both the leading parties, the BJP and the Congress are engaged in bitter contests in three states, there were concerns about inflation rearing its head again.

Fortunately for the BJP-led National Democratic Alliance (NDA), inflation has been at a record low and it is unlikely to climb up steeply in the run-up to the general elections.

Last week, the Reserve Bank of India (RBI), in its fifth bi-monthly monetary policy review, decided to keep the key policy rates unchanged.

The six-member monetary policy committee (MPC) noted that the benign outlook for headline inflation was driven mainly by the unexpected softening of food inflation and collapse in oil prices in a relatively short period of time.

Besides the government, even industry and trade bodies welcomed the RBI’s move

The MPC observed that even as escalating trade tensions, tightening of global financial conditions and slowing down of global demand pose some downside risks to the domestic economy, the decline in oil prices in recent weeks, if sustained, will provide tailwinds.

“The acceleration in investment activity also bodes well for the medium-term growth potential of the economy,” said the MPC. And in this backdrop, it decided to keep the policy repo rate on hold and maintain the stance of calibrated tightening.

It was indeed a relief for the Modi government in Delhi, which has been battling the central bank over the past few months over contentious issues that remain unresolved. The government, especially Finance Minister Arun Jaitley, has been unhappy with the way the RBI has been dealing with interest rates, hiking them to curb inflation.

Mr Jaitley has consistently been urging the RBI to cut interest rates, but the bank has refused to do so. In August, the RBI raised the policy repo rate by 50 basis points, increasing it to 6.5 per cent.

This time though the central bank slashed its inflation projection to 2.7 — 3.2pc by the end of the current fiscal (March-end) from an earlier one of 3.9-4.5pc. However, it feels inflation could rise to 3.8-4.2pc in the first half of the next fiscal, beginning April 2019.

“Even as inflation projections have been revised downwards significantly and some of the risks pointed out in the last resolution have been mitigated, especially of crude oil prices, several uncertainties still cloud the inflation outlook,” according to the RBI.

Besides the government, even industry and trade bodies welcomed the RBI’s move to hold the interest rates. “Credit availability will certainly give more confidence,” remarked Rashesh Shah, president, Federation of Indian Chambers of Commerce and Industry (FICCI). “RBI should cut cash reserve ratio and interest rate, and release more liquidity, along with other supporting measures like reduction in the risk weightage for MSME and affordable housing loans to enhance credit flow,” he adds.

THE central bank’s MPC, however, retained the GDP forecast at 7.4pc for the current fiscal and said it would accelerate to 7.5pc in the first half of 2019-20 (April to September).

India’s growth slowed down in the September quarter to 7.1pc, the lowest in three quarters. However, GDP growth was far less in the July-September quarter of 2017, at a mere 6.3pc.

Another factor that may have led to the MPC deciding to opt for the current rates is the sharp fall in the price of oil. India imports 80pc of its oil and even a minor increase of $1 per barrel leads to a hefty nearly Rs62 billion increase in its bills.

Oil prices shot up to a four-year high of $86 a barrel in early October, but the past few weeks have seen a sharp fall. With oil prices dipping to a little above $50, India stands to gain substantially.

The oil price dip and the central bank’s decision to hold the interest rates are expected to strengthen the Indian rupee.

Interestingly, both the central government and business bodies believe that the flow of funds to industries including construction, real estate and the housing sector has been adversely affected with the RBI hiking the rates in the past.

In the latest Business Confidence Survey of FICCI, the proportion of respondents citing cost of credit and availability of credit as major constraining factors went up to 60pc and 48pc respectively. This was a significant jump of over 41pc and 24pc of the respondents who had reported in the previous survey.

The construction and real estate sectors also heaved a sigh of relief over the RBI’s move to hold on to the interest rates.

“The decision on keeping the key policy rates unchanged is on expected lines and will be a relief for the real estate industry that has been worried over a possible rate hike adversely impacting the market,” says Shishir Baijal, chairman and managing director, Knight Frank India. “Since the last MPC meet there has been a big relief with the fall in crude prices and the strengthening of the rupee, thus, reducing inflationary risk.”

According to Anuj Puri, chairman, Anarock Property Consultants, the recent stand-off between the government and the RBI owing to the NBFC crisis and the apex bank’s endeavour to maintain its autonomy and reserves had caused the real estate industry to watch closely whether the repo rate would increase or remain unchanged.

“Politically, an upward revision would not have served the current government well as the 2019 elections are around the corner,” points out Mr Puri.

“From an economic standpoint, a hike in repo rates would have had a direct impact on home loan rates. High housing loan interest rates are known deterrents to many buyers, especially in the affordable segment where higher interest rates can and do weaken sentiment,” he says.

Published in Dawn, The Business and Finance Weekly, December 10th, 2018