Despite rising number of unsold homes, real estate prices continue to rise

The Confederation of real estate developers association of India (CREDAI) a real estate lobby, has written to the government to provide relief to the real estate sector in the upcoming budget which is scheduled towards the end of this month.
“We want infrastructure status for real estate apart from that there should be exemption from the tax and less formalities to obtain home loans for the buyers,” 
a CREDAI official told the Times News Network.
These moves, the lobby believes, will provide the sector some “cheer”.
Before this, CREDAI had constantly been talking about the need for the Reserve Bank of India(RBI) to cut the repo rate or the rate at which it lends to banks. Raj Modi, president of CREDAI in the National Capital Region had said in January 2015 : “We have been raising the concerns of developers over higher rates from the government. We are happy that RBI has taken a step by cutting the rates. We expect that this will encourage banks to ease their home loan rates…This will help developers to expedite their projects which were otherwise facing fund crunch. Home buyers’ dreams of owning a home would also get a boost as we expect an accelerated purchase cycle.”
This comment came after the RBI decided to cut the repo rate by 25 basis points to 7.75%:
The position taken by CREDAI till date seems to be that people are not buying homes because interest rates are high. If RBI starts cutting the repo rate it will lead to banks cutting the interest rate they charge on their home loans. People will borrow and buy homes. And everybody will live happily ever after. 

Only if things were as straightforward as that. 
I have explained in the past that the major reason why Indians are not buying as many homes as they were in the past is because prices are too high in comparison to the income of people. Further, despite slowing sales, most real estate companies and builders have not budged and refused to cut prices.
This becomes clear through the research report titled 
India Residential Market Preview for the period October to December 2014, released by Liases Foras, a real estate research and rating company. The research report provides data for six cities (Mumbai Metropolitan Region, National Capital Region, Chennai, Bangalore, Hyderabad and Pune).
The report clearly shows that sales continue to remain slow as the total number of unsold homes pile up. “The unsold stock rose 17% from 709 mn SqL in Dec 13 (Oct to Dec 2013) to 832 mn SqL in Dec 14 (Oct to Dec 2014),” the report points out. Yearly sales across the six cities that the report covers declined by 1.1%.
Despite huge number of unsold homes and falling sales, home prices continued to rise, though not at the same pace as they have in the past (as can be seen from the accompanying table). 


Weighted Average Price of a Flat in Oct to Dec 2013

Weighted Average Price of a Flat in Oct to Dec 2014

% increase in price

Months of unsold inventory as on Dec 2014

Months of unsold inventory as on Dec 2013

Mumbai Metropolitan Region

Rs 1.23 crore

Rs1.32 crore




National Capital Region

Rs 73.09 lakh

Rs 74.79 lakh





Rs 85.21 lakh

Rs 85.55 lakh





Rs 61.57 lakh

Rs 63.37 lakh





Rs 55.84 lakh

Rs 56.94 lakh





Rs 70.51 lakh

Rs 74.77 lakh




Source: Liases Foras

A glance through the column in the table which lists the weighted average price of a flat across various cities, makes it clear how homes have become totally unaffordable across the length and breadth of India. And this is where the problem lies. 
Other data also clearly shows this unaffordability of homes across India. Take a look at the following table from the National Housing Bank. It shows the breakdown of home loans given by housing finance companies for buying old homes. 

Source: National Housing Bank

As is clear from the above table more than half of the total loans given by housing finance companies have been given to homes worth more than Rs 25 lakh. The data for 2014 is not available. Nevertheless, there is not much reason to believe that the situation would have changed much from what it was in 2013. 
The following table shows a breakdown of home loans given by housing finance companies towards the buying of homes (both old and new). 

Source: National Housing Bank

The above table shows that more than 47% of all home loans given by housing finance companies were for homes above Rs 25 lakh. This number has jumped dramatically since 2012, when it was at 43%. It also needs to be pointed out that at Rs 25 lakh it would be next to impossible to buy anything half decent in the six cities that Liases Foras tracks. It would be interesting to know, what portion of the total home loans is made of home loans over Rs 50 lakh. 
Hence, homes are so expensive that it has led to a situation where the share of housing as a proportion of the Indian GDP is very small. As can be seen from the following table, the only countries that are behind us when it comes to housing are Bangladesh, Sri Lanka and Pakistan. 

Source: National Housing Bank

Hence, affordability is the major issue when it comes to real estate. As the Report on Trend and Progress of Housing in India 2013 points out: “This phenomenon[i.e. affordability] has the potential to exclude a large segment of the society as they get priced out of the formal housing finance market…It continues to remain the most critical aspect of housing for a vast segment of the population.” 
Interestingly, the Technical Group of Housing Shortage estimates that the housing shortage in urban India was at 18.78 million in 2012. In rural India the number was at 43.9 million. 
What this clearly tells us is that India’s real estate companies and builders have been building homes for only a a very small segment of the population. And even this segment is now not in a position to buy the homes that are being build, given the price that they are being sold at. 
It is time the real estate sector woke up to this opportunity. The government also needs to address this, by rapidly addressing supply side issues like archaic building bye-laws, delays in project approvals etc. At the same time it also needs to figure out how to drive down high land costs. And on top of everything, it needs to figure out how to tackle the massive amount of black money that the sector attracts

The column originally appeared on as a part of The Daily Reckoning on February 9, 2015

What Jaitley is doing to meet the Rs 1,05,000 crore tax collection gap

Fostering Public Leadership - World Economic Forum - India Economic Summit 2010In the Mid Year Economic Analysis released in December 2014 it was estimated that the government will run short of the projected tax revenues by Rs 1,05,084 crore. As I have suggested in the past, this means that the government will have to slash its expenditure big time, in order to meet the fiscal deficit target of 4.1% of the GDP that it had set for itself when it presented the budget in July 2014.
deeper reading of a newsreport in The Economic Times suggests that this will now partly happen on its own. The government expenditure is essentially categorized into two categories-plan and non-plan. Plan expenditure is essentially money that goes towards creation of productive assets through schemes and programmes sponsored by the central government.
Non-plan expenditure on the other hand is an outcome of planned expenditure. For example, the government constructs a highway using money categorised as a plan expenditure. But the money that goes towards the maintenance of that highway is non-plan expenditure. Interest payments on debt, pensions, salaries, subsidies and maintenance expenditure are all non-plan expenditure.
Data released by the Controller General of Accounts(CGA) suggests that during the first nine months of the financial year the period between April and December 2014, the government spent Rs 3,52,631 crore or 61.3% of the Rs 5,75,000 crore plan expenditure that the government had budgeted for.
A government rule does not allow it to spend more than 33% of the plan expenditure in one quarter. At the same time the government cannot spend more than 15% of the plan expenditure in March. 

Given this, how do the numbers stack up? 33% of Rs 5,75,000 crore, the budgeted plan expenditure for the year, amounts to Rs 1,89,750 crore. The government has already spent Rs 3,52,631 crore between April and December 2014. Hence, for the current financial year as a whole, it cannot spend more than Rs 5,42,381 crore (Rs 3,52,631 crore plus Rs 1,89,750 crore).
This means that the government will automatically end up not spending Rs 32,619 crore. In fact, the 33%/15% rule applies at the ministry, department as well as scheme level. Given this, the actual number can be slightly different from the overall number arrived at.
What this means is that the government will have to further slash plan expenditure in order to meet the tax gap of Rs 1,05,084 crore. This shouldn’t come as a surprise given that in the last two financial years, this is exactly what the government did.
The plan expenditure target of the government during the last financial year was at Rs 5,55,322 crore. The actual plan expenditure came in at Rs 4,75,532 crore, which was close to Rs 80,000 crore or 14.4% lower. This is how the fiscal deficit of 4.6% of GDP was achieved.
A similar strategy was followed in 2012-2013 as well. In 2012-2013, Rs 5,21,025 crore was budgeted towards plan expenditure. The final expenditure came in 20.6% lower at Rs 4,13,625 crore.
The Economic Times suggests that the plan expenditure this time around will be Rs 80,000 crore lower. The paper goes on to suggest that this will be Santa’s late gift to finance minister Arun Jaitley.
This can hardly be the case given that plan expenditure is asset creating. In an environment where private investment continues to remain slow, if the government expenditure is also cut dramatically, it can’t be good for the economy. But given that the government’s revenue projections have gone dramatically wrong there is nothing much it can do other than slashing plan expenditure, given that non plan expenditure cannot be easily slashed.
The bigger problem here remains that India’s tax collections are very low in comparison to its gross domestic product. Analysts Ritika Mankar Mukherjee and Sumit Shekhar of Ambit Capital in a recent report titled 
Modi’s ambitions will reshape India’s fiscal construct show that India’s tax collections are abysmally low as a proportion of its GDP. The next exhibit shows that clearly. 

Exhibit 1:India’s tax-to-GDP ratio remains
abysmally low at 11% as per FY15 Budget Estimates

Source: CEIC, Ambit Capital research, Note: Data is presented on financial year basis

At the same time, as the next exhibit shows, the tax to GDP ratio of India is lower than that of other emerging markets 

Exhibit 2: India’s tax GDP ratio is lower
than that of most emerging market peers

Source: World Bank, Ambit Capital research, Note: Data is presented on calendar year basis

Given this, it is very important that the government figure out ways of improving its tax collections. This is especially important in light of the fact that the government seems to have huge plans for spending money on improving India’s pathetic public infrastructure. 
As the Ambit Capital analysts point out: “India’s tax-to-GDP ratio has been range bound between 8% and 12% over the past two decades. Furthermore, a comparison with peers as well as with developed countries like the UK points to the vast tax revenue-generating potential in India which suffers from large-scale tax evasion.” 
The Ambit analysts also feel that boosting India’s tax-to-GDP ratio will be one of the major things that the Narendra Modi government will do over its term. As they point out: “Our discussions with well-placed policy experts suggest that enhancing India’s abysmally low tax-to-GDP ratio is likely to be one of the primary objectives that Modi will pursue over his five-year term.” 
One way of improving the tax-to-GDP ratio is to go about reducing the total amount of black money in the Indian financial system in a systematic way. While the government has made a lot of noise about bringing about all the black money that has left the Indian shores, it hasn’t had much to say about the black money floating around in India, which would be significantly easier to recover. Going after the black money in India would be the quickest way to significantly improve the country’s abysmally low tax-to-GDP ratio. 
The other major area that needs to be looked at are the tax rates and exemptions that come with them. As Swaminathan Aiyar pointed out in a recent column in The Times of India: “Currently , India has among the highest tax rates in Asia, but also hordes of exceptions.” 
Along with the budget every year, the government releases the revenue foregone number. This number for the last financial year 2013-2014 was estimated to be at Rs 5,72,923.3 crore. “The estimates and projections are intended to indicate the potential revenue gain that would be realised by removing exemptions, deductions, weighted deductions and similar measures,” the statement of revenue foregone points out. 
In the table that follows it can be clearly seen that the Indian corporates benefit the most out of all the exemptions and deductions available under the various tax laws in this country. The businesses benefit the most with corporate income tax, excise duty and customs duty foregone, forming a bulk of the revenue foregone by the government. 



(in Rs crore)



Corporate Income Tax



Personal Income Tax



Excise Duty



Customs Duty





Source: Annual budget

The revenue foregone number is based on certain assumptions. As the statement points out ” The estimates are based on a short-term impact analysis. They are developed assuming that the underlying tax base would not be affected by removal of such measures….The cost of each tax concession is determined separately, assuming that all other tax provisions remain unchanged. Many of the tax concessions do, however, interact with each other. Therefore, the interactive impact of tax incentives could turn out to be different from the revenue foregone calculated by adding up the estimates and projections for each provision.” 
Nevertheless, it is too big an amount to be ignored. In fact, the number is bigger than the projected fiscal deficit of Rs 5,31,177 crore for this financial year. Given this, the government needs to go through these exemptions carefully and figure out whether they are really needed. 
Of course, this exercise may not be possible to carry out before the budget, but it needs to be taken up seriously. Lower tax rates along with fewer deductions and exemptions should go a long way in improving India’s tax-to-GDP ratio.

(The article originally appeared on as a part of The Daily Reckoning on Feb 6, 2015)

Why 7% economic growth looks difficult despite new GDP data

deflationVivek Kaul

Pessimism sells. For reasons I have never understood, people like to hear that the world is going to hell, and become huffy and scornful when some idiotic optimist intrudes on their pleasure.” Professor Deirdre McCloskey – Quoted in The Absolute Return Newsletter

Last Friday the ministry of statistics and programme implementation released a new way of measuring the gross domestic product. The ministry changed the base year for measuring GDP from 2004-2005 to 2011-2012.
The structure of an economy keeps changing. Further, the quality of data that the government has access to keeps improving as well. These changes need to be incorporated in the way the GDP is calculated.
As Crisil Research points out in a recent research note: “The revised series is much wider in scope. The coverage has now expanded to include trade carried out by manufacturing companies (this was earlier a part of trade under service sector), and, among others, partnership firms covered under Limited Liability Partnership Act.”
In fact, as per the new GDP data the Indian economy grew by 4.9% during 2012-13, and 6.6% during 2013-14. The earlier calculations had suggested that the Indian economy grew by 4.5% in 2012-2013 and 4.7% in 2013-2014.
The expected GDP numbers for 2014-2015 calculated as per the new method will be released on February 9, 2015. While the difference in GDP growth is not much in 2012-2013, the difference in 2013-2014 is significant. “Private consumption, government consumption and fixed investment growth were all understated in the old series,” points out Crisil Research explaining why the GDP growth in 2013-2014 jumped as per the new method.
This jump in growth has been questioned by Arvind Subramanian, the chief economic adviser to the ministry of finance.
In an interview to the Business Stanard he said: “This is mystifying because these numbers, especially the acceleration in 2013-14, are at odds with other features of the macro economy. The year 2013-14 was a crisis year – capital flowed out, interest rates were tightened and there was consolidation – and it is difficult to understand how an economy’s growth could be so high and accelerate so much under such circumstances.”
Raghuram Rajan, the governor of the Reserve Bank of India, also advised caution.
As he said in a press conference on February 3, 2015: “We do need to spend more time understanding the GDP numbers and we will be watching February 9 releases with great care and delve in deeply into what we see there. At this point, it is premature to take a strong view based on these GDP numbers. Most of the data that we have seen for 2013-2014, except inflation which was very strong, give us a sense that there was lack in the economy.”
Nevertheless, this jump has led to the belief that the economic growth during the current financial year will be much higher than the 5.5% economic growth that has been previously projected.
An editorial in the Business Standard newspaper pointed out: “The new numbers for 2014-15 will be published on February 9, but the expectation certainly now is that the number will be even higher, perhaps in excess of seven per cent.”
Other ground level data suggests that this is too optimistic. As economists Taimur Baig and Kaushik Das of Deutsche Bank Research point out: “Evidence at the ground level (i.e. sales and earnings data from corporates) and other high frequency macro indicators continue to indicate that the economy is yet to see a capex recovery and meaningful pick-up in activities.”
The quarterly results of companies for the period October to December 2014 have been very poor
As Swaminathan Aiyar writes in The Economic Times: “CNBC data show that for 664 companies that till last week had declared their financial results for the third quarter, sales are up just 1.3% and net profits by just 3.4% on a year-on-year basis. On a quarter-on-quarter basis, sales are down 2.8% and net profits by 6.1%.”
Inflation is not factored into corporate results. Nevertheless, if we do that it is safe to say that sales and profits of companies have fallen on a yearly basis as well. This is clear evidence of the fact that the overall economy is not doing well. It also gives an indication of the fact that consumers are not ready to spend freely.
Given that companies are not doing well, it has also led to a slow growth in tax revenues for the government. At the time the government presented its budget in July 2014, it had assumed that the tax revenues would grow by 16.9% in comparison to the last financial year. But the tax collected for the first nine months of the financial year between April and December 2014 grew by just 5.4% in comparison to the same period in the last financial year. In fact, the growth in excise duties has been more or less flat at 0.2%.
Another factor to look at are bank loans. Latest data released by the RBI shows that bank loans have grown by just 6.6% during the course of this financial year. They had grown by 10.1% during the same period in the last financial year. This is a clear indication of the fact that businesses as well as consumers are not in the mood to borrow.
Then there are stalled projects as well. As Arvind Subramanian, the chief economic adviser to the ministry of finance wrote in the Mid Year Economic Analysis released in December 2014: “Stalled projects to the tune of Rs 18 lake crore (about 13 percent of GDP) of which an estimated 60 percent are in infrastructure. In turn, this reflects low and declining corporate profitability as more than one-third firms have an interest coverage ratio of less than one (borrowing is used to cover interest payments).”
Unlike the GDP which is a theoretical construct, these are real numbers and they don’t look very good. Even the Reserve Bank of India remained sedate about the growth scenario. As it said in the latest
monetary policy statement released on February 3, 2015: “Advance indicators of industrial activity – indirect tax collections; non-oil non-gold import growth; expansion in order books; and new business reported in purchasing managers surveys – point to a modest improvement in the months ahead.”
Given these reasons I would be surprised if the GDP growth number to be released on February 9, 2015, will turn out to be close to 7% or more. If it does that will certainly be a huge surprise.

The article originally appeared on as a part of The Daily Reckoning on Feb 5, 2015

Why banks are not cutting interest rates

The Reserve Bank of India (RBI) presented its last monetary policy statement for this financial year, yesterday. It decided not to cut the repo rate which continues to be at 7.75%. The repo rate is the interest rate at which the RBI lends to banks and is expected to act as a sort of a benchmark to the interest rates at which banks carry out their business.
The RBI deciding not to cut the repo rate was largely around expected lines. I had said so clearly in my column dated January 16, 2015. The RBI had cut the repo rate by 25 basis points (one basis point is one hundredth of a percentage) a day earlier, on January 15, 2015.
There was a straightforward reason for this—the RBI had said in the statement released on January 15, that: “Key to further easing are data that confirm continuing disinflationary pressures.” Between January 15 and February 3 no new inflation data has come out. Hence, there was no way that the RBI could figure out whether the fall in inflation (or what it calls disinflation) has continued. Given this, there was no way it could cut the repo rate, unless it chose to go against its own guidance.
The more important issue here is that despite the RBI cutting the repo rate on January 15, 2015, very few banks have acted on it and passed on the rate cut to their consumers. Reuters reports that only three out of India’s 45 commecial banks have cut their base lending rates since the RBI cut the repo rate last month. The base rate is the minimum interest rate a bank is allowed to charge to its customers.
This has happened in an environment where growth in bank loans has slowed down substantially. Every week the RBI puts out data regarding the total amount of loans given out by banks. As on January 9, 2015 (the latest such data available), the total lending by scheduled commercial banks had grown by 10.7% over a one year period. For the one year period ending January 10, 2014, the total lending by banks had grown by 14.8%. This clearly shows that the bank lending has slowed down considerably over the last one year.
In this scenario theoretically it would make sense for banks to cut their interest rate so that more people borrow. As Rajan put it while addressing a press conference yesterday: “To get that lending they will have to be more competitive, which means they will have to cut base rate. I am hopeful it is a matter of time before banks judge that they should pass it on.”
But as I have often explained in the past cutting interest rates does not always lead to more people borrowing because the fall in EMIs is almost negligible in most cases.
As John Kenneth Galbraith writes in The Affluent Society: “Consumer credit is ordinarily repaid in instalments, and one of the mathematical tricks of this type of repayment is that a very large increase in interest brings a very small increase in monthly payment.” And vice versa—a large cut in interest rate decreases the monthly payment by a very small amount. So interest rate cuts do not always lead to people borrowing more.
Hence, the banks run the risk of cutting the base rate and charging their existing customers a lower rate of interest and at the same time not gaining new customers. This will be a loss-making proposition for banks and given that only 3 out of the 45 scheduled commercial banks have cut their base rates since January 15, 2015.
Banks increase their lending rates very fast when the RBI raises the repo rate. But they take time to cut their lending rates particularly in a situation where the RBI has reversed its monetary policy stance and cut the repo rate after a long time.
As Crisil Research points out in a research note released yesterday: “Lending rates show upward flexibility during monetary tightening but downward rigidity during easing. Between 2002 and 2004, while the policy rate declined by 200 basis points, lending rates dropped by just 90-100 basis points. Conversely, in 2011-12, when the policy rate rose by 170 basis points, lending rates surged 150 basis points.”
So when the RBI is increasing the repo rate, banks typically tend to match that increase, but the vice versa is not true. “Lending and deposit rates also move in tandem in times of policy rate hikes, while the gap between them widens when rates fall. Base rates of banks have been steady around 10-10.25% over the last 18 months, while deposit rates started coming down in October 2014 by about 20- 25 basis points because of ample liquidity.,” points out Crisil Research.
This is something that Rajan also talked about yesterday, when he said: “Many [banks] have been relatively quick to cut their deposit rates, but not so quick to cut their lending rates, I presume some are hoping they can get the spread for a little more time to repair banks’ balance sheets.”
When a bank cuts the interest rate it pays on its fixed deposits and at the same time does not cut its lending rate, it earns what bankers call a greater spread. This essentially means more profit for the bank.
Rajan in his statement also talks about banks repairing their balance sheets. This is particularly in r reference to the bad loans of public sector banks. As the latest financial stability report released by the RBI in December 2014 points out: “PSBs[public sector banks] continued to record the highest level of stressed advances at 12.9 per cent of their total advances in September 2014 followed by private sector banks at 4.4 per cent.” The situation hasn’t really changed since then, if the latest quarterly results of public sector banks for the period October to December 2014 are anything to go by.
The stressed asset ratio is the sum of gross non performing assets plus restructured loans divided by the total assets held by the Indian banking system. The borrower has either stopped to repay this loan or the loan has been restructured, where the borrower has been allowed easier terms to repay the loan (which also entails some loss for the bank) by increasing the tenure of the loan or lowering the interest rate.
What this means in simple English is that for every Rs 100 given by Indian banks as a loan(a loan is an asset for a bank) nearly Rs 10.7 is in shaky territory. For public sector banks this number is even higher at Rs 12.9.
The public sector banks are hoping to recover some of these losses by cutting their deposit rates but staying put on their lending rates. And this leads to a situation where even though the RBI has cut the repo rate once, it hasn’t had much impact on the lending rates of banks. “High non performing assets curb the pace at which benefits of lower policy rate are passed on to borrowers. Data shows periods of high NPAs – such as between 2002 and 2004 (when NPAs were at 8.8% of gross advances) – are accompanied by weaker transmission of policy rate cuts. This time around, NPA levels are not as high as witnessed back then, but still remain in the zone of discomfort,” Crisil Research points out.
In this situation, banks will cut lending rates at a much slower pace than the pace at which the RBI cuts the repo rate.

(The column originally appeared on as a part of The Daily Reckoning, on Feb 4, 2015) 

Raghuram Rajan is not an item number; there can’t be something new every 15 days

ARTS RAJANIf you are the kind who watches Hindi film trailers regularly, you would know that item numbers hit television screens regularly; once in about every two weeks is my guess. Such songs, normally do not have any link with the overall story of the movie and are typically included just to get the audience to the theatres, once the movie releases.
Given this, they have a very small shelf life. Of course there are songs like choli ke peeche kya hai which fall into this category and have survived the test of time. But they are exceptions that prove the rule.
The mainstream media also needs its shares of item numbers to keep the audience interested. And given the state of our country, there is no dearth of such events. It could mean non-stop coverage of a child who has fallen into a bore-well or a sting operation that merely states the obvious.
One part of the media which does not get enough item numbers is the business media. And typically they look forward to the days on which the Reserve Bank of India (RBI) presents the monetary policy. Today was one such day and business media was waiting for it with bated breath.
But the item number turned out to be a
bhajan when the RBI governor Raghuram Rajan decided not cut the repo rate in the Sixth Bi-Monthly Monetary Policy Statement, for 2014-2015. Repo rate is the rate at which the RBI lends to banks and is currently at 7.75%.
Rajan had cut the repo rate on January 15, 2015, by 25 basis points. This was an inter-meeting cut with no monetary policy announcement being scheduled on that day. This cut had left the media gasping for more cuts.
Rajan in a press conference after the policy was announced today rubbed salt into media’s wounds(i.e. their disappointment at the repo rate not being cut) by saying that “monetary policy is a long term process. Don’t hold me for something new every 15 days.”
A rate cut would made the day easier for the business media. The stock market would have rallied. The experts would have explained why the stock market has rallied. Still other experts would have told us which are the stocks to buy now. The economists could be got in to explain, why the RBI cut the repo rate. They could also speculate about whether the RBI would cut the repo rate by 25 basis points or 50 basis points on April 7, 2015, the day, the next monetary policy statement is scheduled to be announced. And the television anchors could have brought out their million dollar smiles. All in all everyone would have had a good time.
But in the words of Sahir Ludhianvi made famous by Amitabh Bachchan “
magar ye hona saka”.
Nevertheless, if people had chosen to read the last monetary policy statement carefully enough, they would have known that the chances of the RBI cutting the repo rate again on February 3, were next to nothing.
The statement had clearly said: “Key to further easing are data that confirm continuing disinflationary pressures.” This means that if inflation keeps falling or remains stable, the RBI will cut the repo rate more in the days to come. The trouble was that between January 15 and today no new inflation data was released. That will happen only next week.
In the same statement the RBI had further said that “also critical would be sustained high quality fiscal consolidation.” This financial year is more or less over. The only way the RBI can figure out how the government is planning to manage its fiscal deficit for the next financial year is by studying the annual budget once it is out on February 28, later this month. The fiscal deficit is the difference between what a government earns and what it spends.
Given this, any further rate cuts would mean waiting for new inflation data to come out as well as waiting for the government to present its budget.
As the RBI said in the monetary policy statement released today: “The Reserve Bank also indicated that 
“key to further easing are data that confirm continuing disinflationary pressures. Also critical would be sustained high quality fiscal consolidation…”. Given that there have been no substantial new developments on the disinflationary process or on the fiscal outlook since January 15, it is appropriate for the Reserve Bank to await them and maintain the current interest rate stance.”
Over and above this the RBI also needs to take a look at a few other data points that are scheduled to be released. Sometime late last week, the ministry of statistics and programme implementation released a new method of calculating the GDP. This changed the base year for calculating the GDP from 2004-2005 to 2011-2012. The structure of the economy keeps changing. Hence, the GDP calculations also need to keep pace with this change. Over and above that the data that the government has access to keeps improving over the years, and this also needs to be incorporated in the way the GDP is calculated.
This new GDP data essentially suggests that the Indian economy grew by 4.9% during 2012-13, and 6.6% during 2013-14. The earlier calculations had suggested that the Indian economy grew by 4.5% in 2012-2013 and 4.7% in 2013-2014.
On February 9, later this month the government will release the expected GDP growth for 2014-2015, using the new method unveiled late last week. The RBI will have to take this into account while deciding what to do with the repo rate in the days to come.
Along with the new GDP, the RBI also will have to monitor the revision in the way the consumer price index is calculated. As the central bank said in its statement: “As regards the path of inflation in 2015-16, the Reserve Bank will keenly monitor the revision in the CPI, which will rebase the index to 2012 and incorporate a more representative consumption basket along with methodological improvements.”
Given these reasons, the next action from the RBI on the repo rate front, will happen only after the government has presented its annual budget irrespective of the business media continuing to make a song and dance about it.

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

This column originally appeared on on February 3, 2015