It drew comfort from the easing headline inflation aided by food prices, but the stubbornly high core inflation – stripping out food and fuel – is keeping the Monetary Policy Committee (MPC) wary of any premature fallout of easing over the likelihood that inflation could remain above the target next fiscal year too. It estimates inflation at 5.3 percent, above the target of 4 percent.
The RBI differed in the estimates of growth for the next fiscal year at 6.4 percent, 10 basis points lesser than what the Economic Survey forecast.
One basis point is 0.01%.
The Chief Economic Advisor forecast India’s economy to expand at 6.5 percent, but it could be in the range of 6 to 6.8 percent depending on the swing in global factors.
“The MPC was of the view that further calibrated monetary policy action is warranted to keep inflation expectations anchored, break the persistence of core inflation and thereby strengthen the medium-term growth prospects,” Governor Shaktikanta Das said in a statement. “The reduction in the size of the rate hike provides the opportunity to evaluate the effects of the actions taken so far on the inflation outlook and on the economy at large. It also provides elbow room to weigh all incoming data and forecasts to determine appropriate actions and policy stance.”
The repo rate, at which the RBI lends to banks, was raised 25 basis points to 6.5%, the highest in nearly five years. All other rates moved in tandem by similar magnitude.An ET poll forecast a quarter point increase and a majority expected a shift in stance to neutral from focusing on the withdrawal of accommodation.
“The base case appears to be a pause in the next meeting, but it will be a close call,” said A. Prasana, Head, Fixed-Income Research, ICICI Securities Primary Dealership.
Voices of Dissent
Cracks in the six-member MPC widened with four to two on the repo-rate increase. Prof. Ashima Goyal joined Dr. JR Varma in voting against the rate increase. External members Ashima Goyal and Varma, for the second straight meeting, voted against remaining focused on the withdrawal of accommodation in monetary policy.
RBI insiders and the external members have been diverging in their views on the need for further tightening of monetary conditions. Prof. J.R. Varma is in favour of waiting to assess the impact of the steep increases in the past year before moving ahead and Ashima Goyal believes the liquidity situation has already tightened enough.
But central bankers, including Deputy Governor M.D. Patra, believe that the easing of inflation numbers from the peak may be just transitory and not a durable one; so the MPC should retain the firepower to get the Consumer Price Index (CPI) to the 4 percent target.
“We need to see a decisive moderation in inflation,” said Das. “We have to remain unwavering in our commitment to bring down inflation. Thus, monetary policy has to be tailored to ensuring a durable disinflation process.”
After remaining above the upper tolerance band of 6 percent for more than three quarters, inflation has begun to ease. It fell below the 6 percent mark in the past two months, but it is hard to decide whether it is transient or durable.
Horses for Courses
Monetary policy actions, which have been nearly synchronised since the Global Financial Crisis and post the explosion of Covid virus, are varying with different central banks approaching based on their economies’ needs. While the Federal Reserve Chairman Jerome Powell has reduced the magnitude of rate increases from 75 basis points to 25 basis points, the European Central Bank headed by Christine Lagarde is sticking to increases of bigger magnitude.
The Bank of Japan remains an outlier with it sticking to the yield control policy that was doubled in one stroke to 50 basis points last year as the Yen plunged to multi decade lows versus the US dollar.
Governor Das said that the global scenario is still fluid with the geopolitical situation and monetary tightening by central banks.
“Tighter financial conditions caused by aggressive monetary policy actions, volatile financial markets, debt distress, protracted geopolitical hostilities and fragmentation continue to impart high uncertainty to the outlook for the global economy,” said Das.
Global growth is forecast by the International Monetary Fund to slow to 2.7 percent in 2023 from 3.2 per cent in 2022 as inflation and global recession likely dampens economic activity.