Monetary policy: RBI has sent a clear message—it may not be done yet – The Economic Times*

Clipped from: https://economictimes.indiatimes.com/opinion/et-commentary/monetary-policy-rbi-has-sent-a-clear-messageit-may-not-be-done-yet/articleshow/96117972.cms

Synopsis

RBI has kept the CPI inflation forecast for FY2023 at 6.7% – spiked by prices of cereals, milk and spices. Naturally, its FY2023 GDP forecast has come down to 6.8% from 7%. Since the highs of June 2022, food inflation has moderated in November. But RBI’s worry is that there are not many factors that would taper down CPI in the immediate months.

Paritosh Kashyap

Paritosh Kashyap

Writer is president, Wholesale Bank of Kotak Mahindra Bank

‘I can see only the eye of the bird.’ Arjun’s answer to Dronacharya’s query about his peripheral vision is a much lionised reference to how we should always choose precise goals and concentrate on things that matter while a chaotic world can distract us from our larger purpose. RBI has taken this advice from the Mahabharat to heart, and for good reasons.

*Inflation: By hiking the repo rate by 35 bps – a departure from its 50 bps hikes so far – RBI has also sent a clear message: it may not be done yet. Arjun’s ‘eye of the bird’ is stinging consumer inflation, persisting above RBI’s tolerance level and seemingly the bigger irritant in the larger scheme of things. As Shaktikanta Das reiterated, in the medium term, inflationary pressures put high uncertainty on the economy. Yet, bringing down inflation to 4% is a tough task.

RBI has kept the CPI inflation forecast for FY2023 at 6.7% – spiked by prices of cereals, milk and spices. Naturally, its FY2023 GDP forecast has come down to 6.8% from 7%.

Since the highs of June 2022, food inflation has moderated in November. But RBI’s worry is that there are not many factors that would taper down CPI in the immediate months. The stickiness in core inflation may force RBI’s hand to remain hawkish for most of FY 2023 and at least Q1 FY2024.

*Nearing end of hike cycle: While rate hikes should slow down after February 2023, the quantum will definitely be lower. But there is scope for another 25 bps as widely expected, as the terminal repo rate at the end of the current cycle is firmly pointing towards 6.5%, if not more. RBI may then pause if the December inflation data, US Fed‘s hikes and portfolio flow, and crude oil prices turn favourable.

Such a scenario should also strengthen the rupee that may settle at around 82 a dollar. As exchange rates continue to exert its impact on inflation, RBI is likely to intervene to keep rates within its scope.

*Retail loans: Interest in policy announcements hovers largely around the potential hike in interest rates and the impact on EMIs. Till recently, the real estate industry was growing rapidly, riding a benign interest rate regime and other sops. With hikes, the industry may find affordability a major hurdle.

So far, private consumption and investment have remained robust despite high inflation and borrowing costs. The trends should continue. While SMEs have been borrowing aggressively, larger corporates are yet to enter with their capex agenda.

As of now, India has many bright spots including agriculture, strong rural consumption and non-food credit growth. Indicators like PMI, activity in the construction sector and capex plans in public sectors are all up. Things can get brighter if crude prices stay comfortable and the Fed terminates its rate hikes, leading to more inflows into India.

It’s a tall order to be a central banker that is expected to maintain economic growth when the global scenario is dampening. As central banks may be preparing for a potential low inflation regime, global growth slowdown has emerged as a new pain point for them. On the other hand, RBI is tasked with ensuring high growth with stability – managing a reasonable inflation in the system.

With another rate hike of 25 bps, the central bank may take a longer pause, waiting for the positives to accrue. But for the moment, it’s ‘whatever it takes’ from RBI.

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