Growth-inflation balance now favourable, says RBI | Latest News India - Hindustan Times
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Growth-inflation balance now favourable, says RBI

By, New Delhi
Jun 08, 2024 05:30 AM IST

Analysts believe that the monsoon and the next government’s Budget will be the key factor which determines which interest rates start coming down

The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) retained its hawkish stance although with a growing dissension within its ranks even as it revised upwards its growth estimate for 2024-25 to 7.2% from 7%. It retained the policy rate at 6.5% for the eight consecutive time and the stance of monetary policy continues to be focused on withdrawal of accommodation. The key factor driving this decision could be a growing confidence about the economy’s growth prospects. The “domestic growth-inflation balance has moved favourably”, the MPC resolution said, refusing to cut interest rates and making an upward revision to its growth forecast.

RBI Governor Shaktikanta Das addresses during a press conference regarding the monetary policy decisions, in Mumbai on Friday. (ANI)
RBI Governor Shaktikanta Das addresses during a press conference regarding the monetary policy decisions, in Mumbai on Friday. (ANI)

Analysts believe that the monsoon and the next government’s Budget will be the key factor which determines which interest rates start coming down.

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The first MPC after the 2024 general election results did not change any of the decisions it took in its last meeting in April. To be sure, the disagreements within the MPC seem to be growing. The three-day MPC, which began on June 5, decided with a 4-2 majority to keep the policy rate and the stance of monetary policy unchanged. In its April meeting, it had taken the same decision with a 5-1 majority. Both the dissenting voices in the latest MPC, Jayanth R Varma and Ashima Goyal, are external members. MPC has three members from RBI and three independent experts nominated by the government of India.

MPC made an upward revision to its 2024-25 GDP growth forecast to 7.2% compared to the 7% number it put forth in the April meeting. Its annual inflation forecast continues to remain unchanged at 4.5%. The quarterly growth forecasts are 7.1% for the quarter ending June 2024, 6.9% for September 2024 and 7% for the December 2024 and March 2025 quarters. Quarterly inflation rates are expected to be 4.9%, 3.8%, 4.6% and 4.5%. While the inflation projections are well within RBI’s range of 2% to 6%, they will continue to be above the actual target of 4%. “The MPC will remain resolute in its commitment to aligning inflation to the 4 per cent target on a durable basis”, and “reiterates the need to continue with the disinflationary stance, until a durable alignment of the headline CPI inflation with the target is achieved,” the MPC resolution said.

The National Statistical Office said on May 31 that the Indian economy expanded by 8.2% in 2023-24.

While MPC noted the sustained softening in the headline inflation print and core inflation – this measures the non-food non-fuel component of the inflation basket and is believed to be more resilient to seasonal shocks – it underlined inflationary risks from climate-induced shocks to food prices, rising pressure from input prices in the RBI’s enterprises surveys and the reversal of the global commodity price supercycle.

RBI also tried to counter the belief that its monetary policy decisions are being driven by policy decisions of the US Federal Reserve. “There is a view that in matters of monetary policy, the Reserve Bank is guided by the principle of ‘follow the Fed’. I would like to unambiguously state that while we do keep a watch on whether clouds are building up or clearing out in the distant horizon, we play the game according to the local weather and pitch conditions. In other words, while we do consider the impact of monetary policy in advanced economies on Indian markets, our actions are primarily determined by domestic growth-inflation conditions and the outlook,” governor Shaktikanta Das said in his statement after the meeting.

“This (governor’s statement about the Fed) in our view implies that if domestic drivers like good monsoons help lower food prices, RBI would be open to cutting rates before the Fed. But for that, we think RBI will have to clearly see its modelled one-year-ahead inflation forecast asymptote to 4%,” Pranjul Bhandari, chief India and Indonesia economist, HSBC, said in a research note. “With two external members of the of the MPC calling for lower rates, the pressure to consider easing for the rest of the committee may mount,” Bhandari added.

Three factors, namely, good monsoons, a restrained budget and the possibility of an upward revision in real neutral rates could lead to some easing in interest rates, Bhandari said. “We currently have a 25-basis point rate cut pencilled in for August, but risks are for it to be pushed to later (October). We expect a shallow easing cycle of a total of 50bp in rate cuts, taking the repo rate to 6% by Mar-2025,” her note added.

“ RBI’s assessment of real neutral rate would be a critical input in our call for the first rate cut (October for now) and also the extent of rate cuts possible in the current cycle (50-100bps now). A stance change in August is possible once there is clarity on monsoon, although, we acknowledge that the pre-conditions required for a stance change and for rate cut are increasingly getting blurred. RBI MPC might be more tactical around the timing of stance change to avoid large anticipatory market moves. We would also have to be putting emphasis on the RBI view of independence from the Fed rate cycle, though it is difficult to imagine that the RBI can move before the Fed,” Samiran Chakraborty, chief India economist, Citi Research, said in a note.

The upward revision in growth forecasts notwithstanding, RBI’s decision to keep interest rates unchanged is likely to keep the high mortgage cost driven headwinds to consumption spending intact. “This unwarrantedly high real rate imposes significant costs on the economy because of the short run Phillips curve. The fact that economic growth in 2024-25 is projected to slow by over half a percent relative to 2023-24 is a reminder that high interest rates entail a growth sacrifice. Monetary policy should try to reduce this sacrifice while ensuring that inflation (a) remains within the band and (b) glides towards the targe,” Jayanth R Varma, said in the April MPC meeting while dissenting on the same decision that the MPC has taken in June.

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