New Delhi: With the Reserve Bank of India’s Monetary Policy Committee (MPC) set to announce its decision on interest rates Wednesday, analysts say that it should shift focus now from inflation to growth since both are trending down — the former being a favourable but the latter being undesirable.
The MPC will announce its decision to either keep the repo rate unchanged or hike it marginally by 25 basis points (bps), analysts say. The repo rate is the rate of interest the central bank charges for its loans to commercial banks and, therefore, affects the rate at which the latter lends to companies and individuals. Higher interest rates are, in theory, meant to reduce inflation, but they also come at the cost of slower economic growth.
“It’s a 50-50 chance whether the MPC will hike rates or keep them unchanged,” D.K. Srivastava, chief policy advisor at EY India, told ThePrint. “CPI inflation and WPI inflation are both moving down, with WPI moving down more steeply, and growth is also heading downwards.”
He added that the one element that might convince the MPC to hike rates would be the stickiness of core CPI inflation — that is, the change in prices of goods and services, minus food and energy.
While overall CPI inflation has fallen below the threshold of 6 per cent — coming in at 5.88 per cent in November 2022 and 5.72 per cent in December — core inflation has remained high.
“However, here too, the fall in WPI inflation will likely also pull down core inflation eventually,” Srivastava added, saying that if the MPC hikes rates at all, it will only be by 25 basis points. “A larger hike is not warranted. They should be more concerned about growth. Even at current interest rates, inflation should fall to about 5 per cent by the second half of the year.”
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Global slowdown and slower growth
On the other hand, India’s growth is expected to slow in the coming quarters due in large part to the ongoing slowdown in global growth.
“India’s GDP growth is estimated to increase by 7 per cent in FY23 compared with an increase of 8.7 per cent in FY22,” ICICI Global Securities said in a research note. “Notably, India’s GDP has increased by 9.7 per cent in H1FY23 (first half of the financial year 2022-23). Thus, NSO (National Statistical Office) estimates H2FY23 growth at only 4.5 per cent.”
“Apart from government spending, which is estimated to increase by 7.2 per cent in H2FY23 from -1.3 per cent in H1FY23, all other growth drivers are estimated to see a deceleration,” the note added.
Among the other growth drivers the note talks about, it provides data on consumption indicators, which indicate a slowdown in consumer spending. According to the data, automobile sales (including two-wheelers, tractors, and passenger vehicles) contracted by 4.4 per cent in December 2022 and are still lower by 5 per cent than pre-Covid levels.
“Consumer durables and non-durables are in the contractionary territory in Q3FY23 (September-December 2022),” the note said. “Urban unemployment rate has inched up in December at 10.1 per cent as against 8.9 per cent in November… Net hiring by IT firms has slowed down significantly in April-December 2022.”
In the latest meeting of the MPC in December, there was considerable debate among the members regarding the stance the RBI should take, and also on whether or not a rate hike should be implemented. The RBI’s ‘stance’ is about whether it would be open to further rate hikes (a hawkish stance), whether it would consider rate cuts (accommodative), or whether it would keep rates unchanged (neutral).
In its meeting in December, the MPC stance was kept as “withdrawal of accommodation”, which means it was looking to tighten the money supply to control inflation. ICICI believes that the MPC will likely change this stance either in this meeting or in April.
“Given the growth and inflation outlook and global macro conditions and need to maintain interest rate differential with the US, we believe RBI will do a last 25 bps rate hike,” the ICICI note said. “RBI is likely to change the stance and become data dependent. But uncertainty has increased in the last few days. We believe a change in stance is a close call but if it doesn’t happen now, it will be done in April.”
(Edited by Uttara Ramaswamy)
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