MPC likely to go in for smaller quantum of rate hike

Our Bureau | Updated on: Jul 31, 2022

| Photo Credit: PAUL NORONHA

As retail inflation may have peaked and growth seems to be recovering

Mumbai, July 31

Members of the Monetary Policy Committee (MPC) may settle for a small quantum of policy repo rate hike at their forthcoming meeting, as retail inflation has likely peaked and global commodity prices eased.

Experts say MPC members may go for a 25-35 basis points (bps) hike at the forthcoming monetary policy review. Moreover, a smaller rate hike could aid recovery in growth. Reserve Bank of India Governor Shaktikanta Das will announce the outcome of the MPC meeting on August 5.

The MPC has upped the repo rate twice, cumulatively by 90 bps — from 4 to 4.40 per cent on May 4, 2022, and from 4.40 per cent to 4.90 per cent on June 8, 2022 — as persistent and spreading inflationary pressures were becoming more acute.

Recently, Das observed that inflation appears to have peaked and is beginning to moderate, with the Reserve Bank of India’s approach being to tackle it squarely while keeping growth sacrifice within manageable limits.

Retail inflation eased to 7.01 per cent in June against 7.04 per cent in May. The RBI had revised the inflation target for FY23 to 6.7 per cent from the earlier projection of 5.7 per cent at the last MPC meeting.

The index of industrial production (IIP) or factory output shot up to 19.6 per cent in May against 7.1 per cent in April.

The output growth for the eight core industries in June 2022 was higher at 12.7 per cent against 9.4 per cent in June 2021. The latest output growth print for June was, however, lower than the revised growth of 19.3 per cent for May 2022.

In his last monetary policy statement, Das said: “...the Indian economy has remained resilient, supported by strong macroeconomic fundamentals and buffers.

“The recovery has gained momentum despite the pandemic and the war...India’s recovery is proceeding apace, offering us space for an orderly policy shift.”

Rahul Bajoria, MD & Chief India Economist, Barclays, expects MPC to vote unanimously for a 35 basis points hike in policy rate.

“While inflation is likely to remain elevated in the near term, we think the MPC may acknowledge that price pressures have peaked, and note the favourable tailwinds by reducing its inflation forecasts, albeit marginally,” he said.

Bajoria underscored that international commodity prices are moderating and seasonal drivers are reversing.

Still, tax increases on a number of consumer goods, including gold, and exchange rate depreciation could create additional price pressures in the economy in the coming months.

“Exchange rate pressures alone are unlikely to dictate the MPC’s rate decision. Under the inflation targeting framework, the RBI actions will likely remain guided by the consequences for growth and inflation,” he said.

Aditi Gupta, Economist, Bank of Baroda, opined that aggressive rate hike by Fed is feeding expectations that the RBI may also front load its rate hikes.

However, conditions in India do not warrant an aggressive stance by the RBI. This is because domestic inflationary pressures have shown signs of stabilisation.

“Retail inflation in India surged to 7.3 per cent in Q1 FY23, and is likely to remain elevated in Q2FY23, led by base effect.

“Further, risks to the inflation outlook have subsided. Global commodity prices, including oil, have moderated from their peaks,” said Gupta, adding after depreciating sharply in June and July, the rupee is showing signs of stabilisation which also bodes well for the inflation outlook.

Overall, in the absence of any fresh shocks, India’s inflation trajectory is likely to evolve in line with the RBI’s projections.

Hence, Gupta expects the RBI to hike rates by only 25 basis points (bps) in August 2022, followed by 25 bps rate hikes in the next two meetings.

Published on July 31, 2022
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