The Reserve Bank of India (RBI) has increased its lending rate by around 250 bps since May last year in a bid to cool prices. Another 25 bps hike will take the borrowing costs to a seven-year high.
Inflation remained above the RBI’s target for three straight quarters but managed to fall below 6 per cent in November 2022, only for it to creep up since then.
In February, food prices, which make up about half of the inflation basket, increased 5.95 per cent on an annual basis, while ‘fuel and light’ grew 9.90 per cent. Clothing and footwear costs rose by 8.79 per cent while housing prices increased by 4.83 per cent.
Core inflation, which is exclusive of food and fuel costs, stayed above the 6 per cent mark for the 17th consecutive month.
That said, headline inflation is likely to moderate in the coming months. Analysts said that while the number is set to trend lower in the coming months, it is most likely on a lower base effect.
Nomura expects headline inflation to fall to around 5.5% in March, with core easing to around 5.7%.”Overall, the worst period of high inflation is likely behind us. We expect March inflation to come around 6% and to retreat toward 5 per cent in the coming months,” Motilal Oswal analysts wrote in a note, saying the 25 bps hike in April was a “given”.
Echoing the sentiments, economists at HDFC Bank opined that the latest numbers only affirm their view of a 25 bps hike come April 6 when the rate-setting panel meets.
“This print reaffirms our view that the RBI is likely to raise rates again in its April policy by 25 bps. Policy action post April would be contingent on both domestic risks (food inflation – El Nino, cereals etc.) as well as global central banks’ monetary action (particularly the Fed),” they wrote in a note.
However, Nomura Research has said that the Monetary Policy Committee (MPC) may look the other way.
“We lower the probability of a hike to 20% (previously at 30%) and retain our baseline view of a pause at the April meeting (80% probability), against the consensus view of a 25 bps hike. As both growth and inflation come in below the RBI’s expectations, we also believe a rate cutting cycle remains on the cards this year,” Nomura’s economists wrote on Tuesday.
Among their reasons for RBI potentially staying put are a worsening global outlook, tighter global financial conditions, and a forward inflation profile.
“Monetary policy works with long lags, and the full impact of the past 325bp of cumulative tightening will only be fully reflected in FY24. Hence, a wait-and-watch stance to assess the impact of past actions, rather than react to every data point is critical to prevent overshooting,” Nomura wrote.
The MPC’s take on inflation Vs growth
Minutes of the latest meeting suggest that at least four of the six members of the RBI’s rate-setting panel remained focused on stopping inflation. The other two remain worried about cutting inflation at the cost of ‘fragile’ Indian economic growth.
The RBI’s rate panel on February 8 voted 4-2 to raise the repo rate by 25 basis points to 6.50 per cent to cool retail inflation. External members of the panel Jayanth Rama Varma and Ashima Goyal opposed an increase, fearing risks to the recovery, minutes showed.
Indian economy’s growth appears to be very fragile, and monetary tightening is compressing demand, Varma told PTI in an interview recently.
“In the second half of 2021-22, monetary policy was complacent about inflation, and we are paying the price for that in terms of unacceptably high inflation in 2022-23,” Varma said as per the minutes.
In the second half of 2022-23, monetary policy has, in his view, become complacent about growth, and “I fervently hope that we do not pay the price for this in terms of unacceptably low growth in 2023-24”.
RBI Executive Director Rajiv Ranjan, as per the minutes, said it will be premature to pause the interest rate hike when there are no definitive signs of a slowdown in inflation, particularly core inflation.
“Nevertheless, as the policy rate adjusted for inflation has now turned positive, albeit barely so, there is a case for paring down the pace of rate hike to the usual 25 bps,” he said.