In the toss-up between the need to support growth and contain retail inflation, the monetary policy committee (MPC) is likely to throw its weight behind the former by choosing to stand pat on the repo rate as growth remain weak, according to experts.

Moreover, at this of point, there is little that the monetary policy can do to stanch retail inflation, which is being driven by supply-side constraints.

However, the MPC may revise its earlier GDP and inflation projections for FY23 of 7.8 per cent and 4.5 per cent, respectively, as they were made before the outbreak of the Russia-Ukraine conflict, which has sent commodity prices, including oil and metals, soaring to multi-year highs.

So, GDP projection may be cut and inflation projection may be nudged up.

Resisting temptations

Recent views of top Mint street officials indicate a status quo on repo rate and continuation of the accommodative monetary policy stance.

Reserve Bank of India (RBI) Governor, Shaktikanta Das, has emphasised that the central bank has resisted all expectations and temptations to reverse the monetary policy and move away from its accommodative stance, which is supportive of growth, into a kind of tightening regime.

He noted that the process of recovery is on and the RBI, for the last two years, has remained supportive of growth. “... And we have resisted all expectations and all temptations of reversing our monetary policy ... There is a reason for that ... because we could clearly foresee that inflation will moderate and it did moderate,” Das had said at the CII National Council on March 21.

The policy repo rate (the interest rate at which the RBI lends funds to banks to help them overcome temporary liquidity mismatches) has been static since May 2020. It was last cut from 4.40 per cent to 4 per cent on May 22, 2020, amid the pandemic.

Weak growth story

The MPC will weigh the Industrial of Industrial Production (factory output) growth numbers, which have been disappointing, rising only to 1.3 per cent in January 2022 from 0.7 per cent in December 2021. Further, the committee will also take into account the fact that retail inflation had inched up to an eight-month high of 6.07 per cent in February from 6.01 per cent in January.

MD Patra, Deputy Governor, RBI, last month observed that India’s growth story remains as weak as it was at the time of the 2013 taper tantrum. The recent reverberations of war have, in fact, tilted the balance of risks downwards.

Patra emphasised that the evolution of CPI inflation up to January 2022 shows that statistical base effects have been keeping it elevated; the momentum or month-over-month changes in prices have actually declined during December 2021 and January 2022. As a result of these developments, inflation is less persistent and less generalised than it was in 2013.

“Clearly, recent geopolitical developments pose an upside risk to these (GDP and inflation) projections and the upcoming meeting of the MPC in April will provide a thorough re-assessment, but the focus of monetary policy on price stability with clear accountability and the government’s proactive responses to keep prices in check provides confidence that India will weather this storm,” he said at the IMC Chamber of Commerce and Industry, on March 11.

Inflation forecasts

Aditi Nayar, Chief Economist, ICRA, noted that in the upcoming policy review, the MPC is expected to revise up its CPI inflation forecasts, whereas the growth projections for FY23 would be pared. Nevertheless, the MPC is unlikely to sacrifice growth to control imported inflation.

“With the upper threshold of the medium-term inflation target range being as high as 6.0 per cent, the MPC is likely to remain growth supportive for longer than other central banks. Overall, we expect a status quo policy,” Nayar said. 

However, with the CPI inflation printing above the MPC’s upper threshold of 6 per cent in January and February, she expects the tone to be less dovish, preparing the ground for an imminent stance change. “We expect the monetary policy stance to be changed to neutral in June, accompanied by a hike in the reverse repo rate, narrowing the corridor. 

“Subsequently, we expect a shallow rate hike cycle, with two repo hikes of 25 basis points (bps) each in August and October,“ opined Nayar.

Limited scope

Suman Chowdhury, Chief Analytical Officer, Acuite Ratings & Research, observed that given the deteriorating global growth outlook and its cascading impact on India’s growth recovery, there remains a limited scope for the RBI to tighten monetary policy at the current juncture.

However, due to overwhelming risks to India’s inflation outlook amid spurt in commodity prices along with tighter global financial conditions, the central bank is expected to revise its inflation forecast upwards and lay the ground for a gradual exit from their accommodative stance.

Going forward, Chowdhury expects RBI to restore the width of the LAF (liquidity adjustment facility) corridor to its pre-pandemic levels by hiking the reverse repo rate by 40 bps over June-August 2022 policy review, followed by a cumulative 50 bps hike in the repo rate in the rest of FY23.

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