State Bank of India’s economic research department (ERD) expects one more pause by the Reserve Bank of India’s Monetary Policy Committee (MPC) in view of the recent Consumer Price Index (CPI) and Core CPI numbers. The MPC will hold its bi-monthly deliberations on June 6-8, 2023.

“With CPI declining at 4.7 per cent in April, the question is whether 6.5 per cent is the terminal rate...Given that the current rate of 6.5 per cent is already higher than the required rate of 6.22 per cent, we expect one more pause by RBI MPC meeting in June 23, while carefully watching the CPI and Core CPI number in ongoing months,” said Soumya Kanti Ghosh, Group Chief Economic Adviser, SBI.

The ERD’s machine learning-based analysis is indicating that this terminal rate could decline to 6 per cent in the next quarter, possibly opening up opportunities for MPC to look at the data trends more carefully for a rate action towards the end of the year.

Ghosh noted that the US Fed has likely reached its terminal rate, soothing frayed nerves of markets going ahead.

After hiking the policy repo rate cumulatively by 250 basis points from 4 per cent to 6.50 per cent since May 2022, the MPC hit the pause button at its last meeting in April.

Governor Shaktikanta Das then said, “Let me emphasise that the decision to pause on the repo rate is for this meeting only...While the recent high frequency indicators suggest some improvement in global economic activity, the outlook is now tempered by additional downside risks from financial stability concerns.

“Headline inflation is moderating but remains well above the targets of central banks...Looking ahead, headline inflation is projected to moderate in 2023-24. The monetary policy actions taken since May 2022 are still working through the system.”

Das emphasised that the MPC will not hesitate to take further action as may be required in its future meetings.

SBI’s ERD said the CPI reading for April 2023 at 4.7 per cent substantiates MPC’s decision to take a pause last month.

Impact of climate change on growth

The ERD said concerns remain on the growth front as India remains at the forefront of the most vulnerable countries to the likely adverse impacts of climate change.

Ecowrap noted that India is at the 7th position out of 181 countries in the Global Climate Risk Index 2021, despite slew of controlling measures initiated to control green house gas emissions and promote renewable energy.

“More than 3/4th of Indian districts are considered hotspots for extreme climate events which have a direct bearing on price prints volatility (mostly supply side).

“It is evident that climate change poses a significant threat to India, impairing future growth materially if friction points remain significantly unchecked in time,” the report said.

According to Ghosh, Credit, insurance and capital markets remain quite vulnerable to risks emanating from multiple drivers as the country braces for the return of El Nino this year.

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