*****All RBI is saying is, give growth a chance – The Economic Times

Clipped from: https://economictimes.indiatimes.com/opinion/et-editorial/all-rbi-is-saying-is-give-growth-a-chance/articleshow/92090052.cms

Synopsis

The risks to the central bank’s inflation guidance – a percentage point higher than what it expected two months ago – are now even, it reckons. With food as the main driver of current inflation, a normal monsoon and tax cuts on fuel by the government are pitted against manufacturers passing on input costs and crude oil breaching the assumed average price for the year.

The rate-setting committee of the Reserve Bank of India (RBI) has provided, alongside its second hike in the repo rate of the current upcycle, a trajectory for subsequent increases and a terminal rate. This tracks the central bank’s revised estimate of inflation, which sees the price line stabilising in the third quarter of 2022-23. Given the RBI‘s desire not to upset economic growth, the interest rate cycle is likely to be a shallow dive over the next two quarters – after two increases that still keep the policy rate short of its pre-pandemic level.

In his statement accompanying the Monetary Policy Committee‘s (MPC) decision on Wednesday, Shaktikanta Das has pointed out the RBI’s full-year inflation projection does not factor in the effects of the latest rate action. Interest rate changes could, thus, be fewer, or less intense.

The risks to the central bank’s inflation guidance – a percentage point higher than what it expected two months ago – are now even, it reckons. With food as the main driver of current inflation, a normal monsoon and tax cuts on fuel by the government are pitted against manufacturers passing on input costs and crude oil breaching the assumed average price for the year.

As the monetary stance is still focused on a ‘withdrawal of accommodation’, the RBI is seeking a vigorous and prompt supply response, which it is receiving, as it gently squeezes demand. Improved transmission in the banking system also provides a degree of comfort over softer rate action.

That sensitivity was on display in liquidity management and bond yields reacted positively to a more tempered quantitative reduction, with the chances rising of the government overshooting its borrowing programme for the year.

This also leaves room for greater interplay between fiscal and monetary policies to bring inflation to heel without sacrificing an inordinate amount of growth. An uptick in rural demand and resumption of contact-based urban services provide the MPC comfort of not whittling its GDP growth projections delivered in April.

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