JOIN USNo option but to stay hawkish on inflation
It was a foregone conclusion that the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) would go for a hefty rate hike in view of the continuing inflationary pressure within the country and the aggressive rate hikes and the hawkish commentary by the US Federal Reserve last week. In the event, the MPC made a 50-basis points rate hike and did not seem to be ready to soften the policy in the near future. This is the fourth straight increase in the current cycle since May this year. The RBI has kept its retail inflation forecast for 2022-23 unchanged at 6.7 per cent even though it has noted that there are upside risks to food inflation. It has also cut down its growth forecast for the current financial year from 7.2 per cent to 7 per cent. More importantly, its growth forecast for 2023-24 is still lower at 6.4 per cent. Most economists’ projections of growth for the next year are still lower and are in the range of 5.5-6 per cent.
Given the present situation and the likely scenario in the near future, the policy will continue to be hawkish. There is the likelihood of another 40-50 basis points hike going forward, though the crude oil prices, the depreciation of the rupee and the US Fed’s rate decisions and outlook will be important factors that influence the RBI’s decision. The repo rate is now 5.9 per cent, which was the rate in June 2019. Governor Shaktikanta Das has pointed out that with inflation expected to be elevated at around 6 per cent and with liquidity still in surplus, overall liquidity conditions remain accommodative. He has also asserted that there is adequate liquidity in the system and that increased government spending would mitigate the recent tightness. But there are fears that liquidity will be short during the festival season and that may have an impact on trade and business activity in the busy season. The RBI may need to take steps to deal with the situation.
The RBI Governor did not consider the depreciation of the rupee and its impact on the current account deficit very important. This may be because the dollar is expected to lose some of its present strength in the medium term. There is a view that the rupee may depreciate further to levels of 83 against the dollar, but that it may not do much damage if the fall is gradual and orderly. The problem is that with inflation remaining high, the current account deficit remaining wide and the rupee sliding, there is little room for action for the RBI. It will have to remain hawkish in the near term.