Rate hike: Inflation remains a concern

The decision of the Reserve Bank of India’s Monetary Policy Committee (MPC) to raise the benchmark policy repo rate was not unexpected. At its meeting on Thursday, the MPC decided to raise the rate by 35 basis points, taking it to 6.25 per cent. This is a level last seen in March 2019, and the decision shows that the MPC’s view is that retail inflation is still a threat and needs to be fought. The decision was taken by a 5-1 vote with one member, Jayant Varma, voting against the hike. The MPC also decided by a majority of two to remain focused on withdrawal of accommodation. The decisions show that inflation remains the core concern of the RBI. The RBI’s pace of rate increase has moderated now, but indications are that the end of the current rate cycle is still not in sight.

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The central bank expects retail inflation to be 6.6 per cent in the current quarter (October-December), and 5.9 per cent in the next (January-March 2023). It might mean that the level of inflation in 2022-23 would be 6.7 per cent, which will be higher than the upper band of the RBI’s mandated level. October marked the 10th straight month in which inflation was higher than 6 per cent. An easing was seen in October but that was because of a fall in food inflation. The rate of core inflation is not showing any downtrend. The policy statement noted that the “battle against inflation is not over”, and further policy action is needed to keep “inflation expectations anchored, break core inflation persistence and contain second-round effects”. The RBI, however, hopes that price pressures will ease in the medium term and average 5.2 per cent in the first half of the next financial year. But it should be noted that even this level will be above the target of 4 per cent. The RBI is likely to expect inflation to stabilise at lower levels before reviewing its present stance.

The central bank has also lowered its forecast for growth to 6.8 per cent this year, down from its September assessment of 7 per cent and its August forecast of 7.2 per cent. The estimates for the current quarter and the next have also been lowered to 4.4 per cent and 4.2 per cent from the 4.6 per cent projected earlier. It also said that the new projections were occasioned by the risks to growth from protracted geopolitical tensions, tightening global financial conditions and slowing external demand. With the tightening of monetary conditions, growth outcomes will be affected but the RBI’s attention is focussed on maintaining price stability. This is based on the well-established wisdom that inflation tends to do more harm to the economy than slack growth.