RBI retains inflation, growth path in MPC | Latest News India - Hindustan Times
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RBI retains inflation, growth path in MPC

By, New Delhi
Apr 06, 2024 12:50 AM IST

Governor's elephant analogy hints at possible future interest rate cut by RBI, despite maintaining unchanged policy rate at 6.5% to curb inflation.

A pachydermic analogy offered by the governor of the country’s central bank has prompted analysts to speculate about the prospect of a cut in interest rates later this year, although, for now, the Reserve Bank of India’s (RBI) Monetary Policy Comment (MPC) has left the policy rate unchanged at 6.5% and retained its monetary policy stance as one focused on “withdrawal of accommodation”, which means the emphasis on curbing inflation remains.

RBI Governor Shaktikanta Das (ANI)
RBI Governor Shaktikanta Das (ANI)

That will bring little cheer for borrowers, corporate and retail, including people who have seen their mortgage tenures extend. MPC has kept the policy rate unchanged at 6.5% since February 2023 after it started raising rates from May 2022 . The policy rate was at 4% in April 2022.

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“The (inflation) elephant has now gone out for a walk and appears to be returning to the forest. We would like the elephant to return to the forest and remain there on a durable basis,” governor Shaktikanta Das said in his written statement after the first MPC of the RBI for the fiscal year 2024-25.

The statement, analysts believe, suggests that RBI is likely to cut the interest rate later rather than sooner.

Friday’s decision by the MPC, and the tone and tenor of the MPC resolution, is in keeping with its slightly overcautious approach to managing inflation in the Indian economy in the recent past. The reason RBI is persisting with this approach is also a reflection of the fact that the economy’s growth prospects continue to be good despite interest rates being high.

The latest MPC resolution has retained its February projection of 7% GDP growth, and 4.5% inflation for the economy. “Looking ahead, robust growth prospects provide the policy space to remain focused on inflation and ensure its descent to the target of 4%,” Das said in his statement.

The MPC statement also makes it clear that food prices are the biggest concern for the inflation outlook going forward, despite expectations of a record harvest for the winter crop. “Going ahead, food price uncertainties would continue to weigh on the inflation outlook. An expected record rabi wheat production in 2023-24, however, will help contain cereal prices. Early indications of a normal monsoon also augur well for the kharif season. On the other hand, the increasing incidence of climate shocks remains a key upside risk to food prices. Low reservoir levels, especially in the southern states and outlook of above normal temperatures during April-June, also pose concern. Tight demand supply conditions in certain pulses and the prices of key vegetables need close monitoring”, it said, adding that “food price pressures have been interrupting the ongoing disinflation process, posing challenges for the final descent of inflation to the target”.

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Experts believe that repeated climate shocks to food production and prices could have made RBI more circumspect about the inflation environment in the Indian economy.

“It appears that the frequent supply-side shocks (particularly climate shocks on food prices) in the past few years have made MPC wary about the upside risks to the baseline inflation forecast though those risks remain largely non-specific. This could be another factor to delay any easing of monetary policy and it is likely that t MPC would want to have certainty on monsoon progress before it can consider even a shift in stance”, Samiran Chakraborty, chief India economist, Citi Research, said in a note.

To be sure, analysts also believe that RBI’s decision on interest rate cuts could also be linked to exogenous factors such as interest rates cuts by the US Federal Reserve. “We have been saying that the central bank will not ease rates before the Fed. But its continued emphasis today on using the current policy space to sustainably lower inflation to 4% makes us believe that it may decide to wait some time longer, even after the Fed moves,” Pranjul Bhandari, chief India economist for HSBC, said in a research note. “All said, we expect RBI to delay its easing cycle, making its first rate cut in 3Q24 (2Q previously). We believe by then the Fed would have eased (we expect the first Fed rate cut in June), we will have a good handle on how the summer crop is faring, and we would know the overall liquidity impact of index inclusion led bond inflows,” the note added.

While it is not mentioned in the MPC resolution, RBI also talked about conducting a reassessment of potential growth and real neutral rates after the 2023-24 GDP data is released in May.

ALSO READ- ‘Elephant has gone for a walk’: RBI governor Shaktikanta Das on inflation after MPC meet

“To recall, RBI has mentioned real neutral rates to have dropped to 80-100bps in FY22 compared to 160 – 180bps in FY15 because of the pandemic. Real neutral rates might have reverted closer towards pre-pandemic levels now indicating the need to keep policy rates elevated. But, on the other hand, if RBI increases its potential growth estimates (implying a lower output gap), then a simple Taylor Rule framework would suggest a lower nominal policy rate, all else being equal,” Chakraborty said in his research note.

MPC member Prof Jayanth R Varma, who has been asking for reduction in policy rate, made a similar argument in the February MPC meeting. “If the potential growth rate of the economy is close to 8%, then the economy is not at risk of overheating in 2024-25. A real interest rate of 1-1.5% would then be sufficient to glide inflation to the target of 4%. A real interest rate of 2% creates the very real risk of turning growth pessimism into a self-fulfilling prophecy,” Varma had said in the February meeting as per its published minutes. The Taylor rule — an interest-rate forecasting model devised by economist John Taylor — gives policy rate prescriptions after taking into account the difference between targeted and actual inflation and potential and actual output growth. It will give a higher prescribed rate if inflation is higher than targeted inflation and output growth is above potential output growth.

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  • ABOUT THE AUTHOR
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    Roshan Kishore is the Data and Political Economy Editor at Hindustan Times. His weekly column for HT Premium Terms of Trade appears every Friday.

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