The first bi-monthly monetary policy meeting for FY24 is scheduled to be held this week, after 250 basis points (bps) of repo rate hikes over the course of FY23. The minutes of the February 2023 meeting, the incremental data released in the last two months and domestic as well as global developments hint that the Monetary Policy Committee (MPC) is likely to tilt in favour of another 25 bps rate hike. Thereafter, a pause is likely for the remainder of this fiscal.

The February MPC minutes had revealed fairly mixed opinions among the MPC members. Most members expressed concerns over persistently high core inflation and the need for continuing vigilance, lending a slight hawkishness to the tone. In contrast, two of the external members of the committee cautioned that excessive front-loading of rate hikes and higher real policy rates could have a negative bearing on growth, and accordingly, preferred a pause in February itself to allow the transmission to run its course.

The headline CPI inflation, at 6.4-6.5 per cent in January-February, is considerably higher than the MPC’s upper threshold of 6 per cent. Moreover, core inflation remained sticky above the 6 per cent mark in both these months. Encouragingly, based on the early trends in retail prices of food items and a high base, the CPI inflation is projected to soften to 5.9-6 per cent in March. Regardless, this would imply an average inflation of 6.3 per cent in Q4 FY23, much higher than MPC’s estimate of 5.7 per cent for the quarter.

The cues on the growth front remain uneven. The year-on-year (y-o-y) performance of a majority of non-financial indicators moderated in January-February, relative to Q3 FY23, although the extent of easing in some indicators was relatively modest. Non-oil exports slipped into a y-o-y contraction in January-February, led by the slackening of external demand and lower commodity prices.

While the 2nd Advance Estimate of crop production for FY23, indicated a healthy trend in the production of rabi crops relative to the Final Estimates for FY2022, there are concerns that the heavy rains since mid-March could affect yields. Overall, the y-o-y GDP growth is likely to witness a mild uptick to 4.5-5 per cent in Q423 from 4.4 per cent in Q3 FY23; this is marginally higher than the MPC’s estimates for the quarter.

Finally, the US Fed recently hiked rates by 25 bps to 4.75-5 per cent, keeping the focus on inflation despite the ongoing concerns in the US banking sector. Moreover, it maintained the median projection of the terminal rate at 5.1 per cent, suggesting a final 25 bps rate hike is likely in the meeting in May.

ICRA anticipates a narrow majority of MPC members may choose to vote for another rate hike in April 2023, even though inflation is expected to soften in FY24 from around 6.7 per cent in FY23. ICRA estimates the GDP growth in FY24 at 6 per cent, lower than the MPC’s projection of 6.4 per cent.

Regardless, various risks abound. Even as unseasonal rainfall is lashing parts of the country, there is a fear that El Nino conditions may develop this summer. This could hurt the prospects of crop output and rural demand, and put upward pressure on food inflation. Global uncertainties persist, with potential spillovers of the banking sector strife adding to the troubles.

The anticipated April 2023 rate hike would take the repo rate to 6.75 per cent, which is more than 100 bps higher than the MPC’s current CPI inflation forecast for H2 FY2024. Consequently, it may be prescient for the MPC to pause through FY24, and assess the transmission of policy tightening as well as the evolving risks to inflation and growth.

The writer is Chief Economist, Head -- Research & Outreach, ICRA