A calibrated stand

The August monetary policy clearly emphasised ‘withdrawal of accommodation while supporting growth’.

RBI MPC august
Amidst elevated inflation levels, the monetary policy clearly emphasised ‘withdrawal of accommodation while supporting growth’.

By Shanti Ekambaram

In line with market expectations, the Monetary Policy Committee (MPC) unanimously approved a 50-bps repo-rate hike, taking it to 5.4%, the steepest in recent times. Given global headwinds, local higher inflation, resilient economic growth, widening current account deficit (CAD) and a depreciating currency, it seems like a well thought and calibrated approach to contain inflation while supporting growth. With the average inflation figure hovering around an ‘uncomfortable’ 6.8% mark, the policy clearly focuses on steps to bring inflation below 6%, the upper limit of the Reserve Bank of India’s (RBI’s) tolerance band. Besides inflation, the design of RBI’s monetary policy has been influenced by global factors, including geo-political forces, financial market volatilities, energy and commodity prices and local factors of widening CAD and currency volatility due to higher imports and capital outflows.

Domestic economic recovery will likely see uneven recovery, with some shift in consumer preferences. We have a sharp recovery in the travel sector (air-traffic passenger growth being a key indicator) and improvement in hospitality sector performance across key metros in the country over the last two months. Such growth will likely come at the cost of growth in consumable goods in the coming months.

Amidst elevated inflation levels, the monetary policy clearly emphasised ‘withdrawal of accommodation while supporting growth’. Though inflation targeting at this stage was important, growth has shown resilient trends. The Indian economy is expected to grow faster than its Asian peers and even other global economies. Bank credit has demonstrated strong growth, particularly with higher consumption and manufacturing activity. With banks being well-capitalised, the government’s capex spending, urban and rural consumption demand, normal monsoons, and corporates deleveraged, the growth trajectory is expected to continue on the earlier predicted path, and RBI has thus left the estimate unchanged at 7.2%  for the current fiscal year. Urban consumption has ranged from stable to strong across segments including contact-intensive services, which have rebounded significantly. Homes, cars, travel and other discretionary spends were strong in Q1. Rural demand was mixed, but with reasonably normal rainfall, it is expected to stabilise as we go further into the year. Manufacturing capacity utilisation increased to 75%, and with government capex push, demand is expected to stay stable. Other key domestic economic segments are seeing recovery, though partly uneven, in the last few months. We may see growth some growth in consumable goods in the coming festival seasons.

Supply-side pressures shows signs of easing

The supply-side pressures, even as they remain, are showing signs of easing. While the local macro-economic factors look stable, global trends that influence the Indian economy seem to be getting more favourable. International crude prices have cooled off, and are currently trending below $100 a barrel. Also, global commodity prices have come down, which is expected to benefit India as we go into the next three quarters of growth. Considering all these factors, the MPC will be focused on controlling inflation while keeping the flexibility to provide liquidity and take measures when needed to support growth.

The inflationary trend is estimated to continue for a large part of this financial year, except in Q4, when it is expected to come down. As per RBI’s estimate, the Consumer Price Index (CPI) inflation is expected to average 7.1% in July-September. After that, inflation is seen easing sharply to 6.4% in October-December and 5.8% in the first quarter of 2023. While keeping a watch on liquidity, RBI would continue to monitor the rupee to curb volatility in the currency market. Given RBI’s close eye and intervention, the rupee has depreciated in an orderly manner—probably better than any of its Asian counterparts. Overall, given the expectation of elevated inflation in the next two quarters, it is likely that the MPC will consider further rate hikes. The MPC will closely monitor global and local factors while taking critical decisions on rates, liquidity and currency to ensure an environment of stability to support growth.

Interestingly, commodity prices have come off from the peak seen in mid-June, owing to fears of a global slowdown; this augurs well for business margins

and value-added growth. Any further decline in commodity prices augurs favourably for domestic businesses and consumers. However, the worsening global outlook and rising uncertainty can take a toll on India’s exports and private sector capex, respectively. Meanwhile, the rupee has depreciated by ~4.6% relative to the dollar since this fiscal began. In addition to exacerbating the inflationary pressures, the rupee depreciation has differentially impacted various sectors of the Indian economy.

The writer is whole-time director-designate, Kotak Mahindra Bank.

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