Explained: RBI could do more repo rate hikes in monetary policy, India story resilient; here’s why – Times of India


The Reserve Bank of India (RBI) has raised the key repo rate by 50 basis points to 5.4% in its monetary policy review. This is the third repo rate hike by the Monetary Policy Committee (MPC) in the ongoing financial year. The repo rate which is the rate at which the RBI lends to the banks has now been raised by 140 basis points this FY.
“Given the elevated level of inflation and resilience in domestic economic activity, the MPC took the view that further calibrated monetary policy action is needed to contain inflationary pressures, pull back headline inflation within the tolerance band closer to the target, and keep inflation expectations anchored so as to ensure that growth is sustained,” the MPC statement read.
As it looks to keep inflation under check, will RBI continue to hike repo rate in the coming months? What are the risks to India’s growth story and inflation? Experts are of the view that more hikes are in order and that the biggest factors driving the MPC’s decisions on inflation and growth are likely to be external.
The rate hike cycle:
Sachchidanand Shukla, Chief economist, Mahindra Group believes that RBI has done a good job of front loading the rate hikes. “In the next few policies while there will be rate hikes, I expect the pace to be lower and calibrated,” he tells TOI. “In effect, while the repo rate has been raised by 140 basis points this quarter, if you club it with other measures to tighten the liquidity, it is effective at around 200 basis points,” he explains.

Shubhada Rao, Founder of QuantEco sees another 50 basis points hike by end of December. “In fact, we do not rule out a 50 bps hike in the next policy review itself. The rate hike decision will also be driven by the evolving global situation and sharp rate hikes by most central banks around the world. The external factors are likely to play an important role in shaping the RBI’s monetary policy decision making,” she tells TOI.
DK Srivastava, Chief Policy Advisor at EY expects another 25 basis points hike in the ongoing FY, possibly towards the later half. He is of the view that rates will be raised because the US Fed is trying to control the unprecedented inflation in America. “The Fed rate hikes are driving dollar inflows into the US which in turn is impacting the exchange rate. So to keep the rupee at a stable level, RBI will have to hike rates,” he tells TOI.
Global headwinds & risk to GDP growth:
RBI notes that the global economic and financial environment has deteriorated. This is due to the combined impact of monetary policy tightening across the world and the persisting war in Europe heightening risks of recession. “EMEs are experiencing capital outflows and reserve losses which are exacerbating risks to their growth and financial stability,” RBI has said.
Shubhada Rao says net exports, in the context of anaemic global growth, could drag the GDP growth lower. “However we have maintained our forecast of 7% growth in FY23,” she adds. According to Rao, urban demand and government-led capex remain supportive of growth. “Rural demand is expected to improve with a satisfactory monsoon performance,” she says.
RBI has said that the domestic economic activity remains resilient. “The southwest monsoon rainfall was 6% above the long period average. Kharif sowing is picking up. High frequency indicators of activity in the industrial and services sectors are holding up.” it said. “Urban demand is strengthening while rural demand is gradually catching up. Merchandise exports recorded a growth of 24.5% during April-June 2022, with some moderation in July. Non-oil non-gold imports were robust, indicating strengthening domestic demand,” RBI explains.

Srivastava of EY says the real GDP growth is likely to be around 7.2%, marginally lower than IMF’s projection. “While the global economic environment has a downside, the ongoing global supply chain substitution has had a positive impact on India,” he tells TOI. “Also with rate hikes, the savings and investments are expected to go up as a result of better real returns. All these will feed well into the GDP growth figures,” he adds.

Shukla of Mahindra Group sees growth outlook to be balanced, but adds that external pressures hold the key. “An important factor one needs to watch out for is the Current Account Deficit. While it is still in the 3-3.5% GDP range, in absolute numbers it is ballooning,” he says. “Even the Balance of Payments is seeing a rise. Such a huge funding gap is a big red flag in a world that is increasingly seeing monetary tightening and an uncertain geopolitical situation,” he tells TOI.
Inflation Outlook:
CPI inflation is still above RBI’s comfort zone of 6%, but experts see lesser risks in the coming months. While inflation is expected to remain elevated at around 7%, there are no major upside risks, says Srivastava. “However, one has to keep track of the emerging geopolitical situation such as the China-Taiwan-Japan news for impact on exchange rate,” he adds.
Sachchidanand Shukla states that it makes perfect sense to stem inflationary pressures at the earliest. “On the inflation front, there are several factors that are working in favour such as agriculture, crude prices and lowering of metal prices,” he notes.

According to Shukla, persistently high inflation will have a more harmful impact on the hard fought economic recovery, as against a short term shock. “Also, this helps correct the anomaly on savings rate and will encourage savings as well,” he adds.
On the other hand, QuantEco’s Rao says uneven monsoon distribution can pose a risk to inflation. “Paddy that has a 5% weight in CPI could face some upward price pressures. We estimate average CPI to remain above the upper threshold of the target band at 6.5% for FY23,” she says.
The MPC has decided to remain focused on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth. With several economies facing risks of recession, and geopolitical tensions persisting, India’s policymaking will increasingly face challenges. However, domestic resilience is expected to help tide over the emerging global crisis, with RBI’s monetary policy playing a key role.

Source link

Like it? Share with your friends!



Your email address will not be published.