The Monetary Policy Committee is expected to raise the repo rate, the rate at which it lends to banks, by 25 basis points like in February, but lower compared with 35 bps increase in December and sharp 50 bps rate hikes in each of the three meetings in June, August and September. Since May 2022, the policymakers have raised the repo rate by 250 basis points to arrest galloping inflation, mostly driven by external factors, especially global supply chain disruption after Russia’s invasion of Ukraine.
However, most have a mixed view about the MPC retaining its policy stance at accommodative or changing it to neutral.
The meet also happens at a time when unseasonal rains and a shock production cut announced by OPEC+ might have changed the MPC calculations.
On that note, let’s take a look at the movement of key economic indicators since the last policy meeting in February.
Growth:
India’s fiscal year 2024 began with the World Bank cutting growth aim for the Asian nation to 6.3% from 6.6% as rising borrowing costs and slower income growth are seen to weigh on private consumption growth. The Asian Development Bank said India’s economic growth is expected to moderate to 6.4% in this fiscal year due to tight monetary conditions and elevated oil prices as compared to 6.8% expansion for the financial year ended March 2023.
India’s Economic Survey 2022-2023 too predicts 6-6.8% growth this fiscal and it will hinge upon If realised, the 6-6.8% growth rate will be the slowest in three years.
India’s gross domestic product (GDP) growth for the October-December quarter slowed to 4.4% from 6.3% in the previous quarter and 13.5% in the first quarter of fiscal 2023, dragged down by contraction in the key manufacturing sector.
Inflation:
One of the key drivers for the policy decision will be the inflation readings and their trajectory.
The print has mostly refused to stay within the central bank’s comfort band. The print slowed to 6.44% in February from 6.52% in January, staying above the mandated tolerance ceiling for a second straight month.
Food inflation came in at 5.95 per cent in February.
The central bank’s mandate is to keep inflation at 4% with 2% of upside and downside margins for the 10th straight month.
During the policy review in February, India’s central bank had cut its inflation forecast for the last fiscal year to 6.5% from 6.7% banking on the worst of price pressures being done away with. However, the governor had flagged stickiness of the core inflation to be a matter of concern and pegged FY24 inflation at 5.3% for 2023-2024, with Q1 at 5%, Q2 at 5.4%, Q3 at 5.4% and Q4 at 5.6%.
Inflation remains centrestage for RBI, Upasana Chachra, Chief India economist, Morgan Stanley, told ET Now.
“The key factor for RBI as it has been until now will be inflation and we saw that upside surprise on the inflation core, inflation to remain sticky. That is going to be the key driving factor for another rate hike tomorrow,” she said.
Rupee movement:
The rupee rose up to 81.92 per dollar today to hit the highest level since March 13.
However, the local currency had closed 2022 as the worst-performing Asian currency with a fall of 11.3%, its biggest yearly slump since 2013, as the dollar strengthened on the Fed’s aggressive monetary policy stance to tame inflation.
A Reuters poll now predicts it to further fall in the coming months. The local unit is expected to move back to trade around where it is now in 12 months, according to a Reuters poll of FX strategists.
The rupee has traded in a 80.88-82.95 per dollar band so far this year and was above 82.10 on Tuesday.
According to Reuters, the local unit may stick to ranges, as the RBI has enough firepower in reserves to carry on with its interventions to prevent excess volatility.
Forex Reserves:
India’s foreign exchange reserves rose $5.98 billion to an over eight-month high of $578.78 billion as on March 24, 2023.
At the start of the last year, the overall forex reserves were at about $633 billion. However, RBI’s intervention last year to arrest a fall in the local currency and a rise in the cost of imported goods had depleted the forex coffers.
Trade Deficit:
India’s merchandise exports fell to $33.88 billion in February from $37.15 billion in the same month a year ago, while imports fell to $51.31 bn as against $55.9 bn in the same month last year.
India’s merchandise trade deficit in February stood at $17.43 billion, $19 billion forecast in a Reuters poll.
Ahead of February policy review, India’s trade deficit stood at $23.8 billion in December.
India’s Economic Survey said it sees export growth to be flat in this fiscal year if the global economy does not pick up. The world economy has started facing formidable headwinds and the ripple effect of the global trade slowdown has started reflecting in India’s goods export growth, the Survey said.
The country’s current account deficit – the broadest measure of trade in goods and services – narrowed to 2.2% of the GDP in the quarter ending December, from 3.7% of the GDP during the July-September period.
Rate Differential:
Last year, Shaktikanta Das had said that the world is in the eye of a new storm or the third major shock, which he said was arising from aggressive monetary policy actions and even more aggressive communication from advanced economy central banks like the US Fed.
Central banks across the world are facing the challenge of walking the tightrope between growth and inflation. The Federal Reserve last month raised rates by 25 bps, following similar rate hike in February, a half-point increase in December and four jumbo-sized 75 basis-point hikes prior to that.
After starting 2022 with a near zero rate, the Federal Reserve has now raised the target range for the federal funds rate to 4.75%-5%. The funds rate was at 4.5%-4.75% before RBI’s February review.
The US monetary authority till before India’s monetary policy in February had said further interest-rate increases were in store as officials debate when to end their most aggressive tightening of credit in four decades. However, it has now indicated the panel is on the verge of pausing further hikes amid recent turmoil in financial markets following the sudden failures of two U.S. banks – Silicon Valley Bank and Signature Bank.
The Fed’s latest policy statement no longer said that “ongoing increases” in rates will likely be appropriate.
Since May last year, RBI has raised rates by 250 bps, while the Fed has increased policy rates by 475 bps.
The rate differential between India and other nations is a key driver for foreign fund inflows and Fed’s rate increases make the Indian market less attractive.
Global Crude Prices:
The price of the Indian basket of crude oil was around $85.14 a barrel as of April 4, government data showed. This is sharply lower from a decadal high of $121.28 per barrel on June 10. Ahead of the previous policy meeting, the average in February was $78.62/bbl.
However, it will be interesting to see if the RBI revises its oil price assumption tomorrow from the $100 level it factored in earlier, after the surprise output cut by oil cartel OPEC and its other allies. The shock announcement drove Brent prices higher, with Goldman changing its forecast following the output cut to $95 per barrel this year-end and $100 in December 2024.
Brent crude futures had risen to over $84 and West Texas Intermediate (WTI) crude futures to $80. They were up from $81.39 a barrel and $74.54, respectively, before the February policy review.
Banks’ Credit Disbursals:
While the RBI has looked to check the run-away inflation, it will also look to keep the economy humming. Demand for loans is a key parameter to gauge economic activities.
According to RBI data, India (RBI), credit growth rate accelerated 156.7% year-on-year during the fortnight that ended March 10 to Rs 133.07 lakh crore. Before the last policy meeting, bank credit rose by 16.7% to Rs 130.46 lakh crore in the fortnight ended November 18.