By Shanti Ekambaram
In an off-cycle policy review, the Reserve Bank of India (RBI) announced a 40 basis points (bps) increase in repo rate to 4.40% on May 4, 2022, in response to the sharp and sustained increase in inflation print. The central bank had also changed its narrative to inflation control and normalising liquidity to pre-Covid levels. As the Monetary Policy Committee (MPC) prepares for a three-day huddle from June 6-8, 2022, rising inflation and price stability will continue to be the two critical factors in deciding the rate trajectory.
Global inflationary pressures
Geopolitical tension, rising commodity prices and local & global inflationary pressures will be the top concerns of the MPC. Consumer inflation touched a nearly eight-year high of 7.79% in April, continuing above the RBI’s target for the fourth consecutive month. In tandem, wholesale inflation continued in double digits and hit a record high of 15.1% in April 2022. Supply chain shortages, rising input costs and fuel prices further elevated the inflation levels.
The government stepped in to announce cuts in fuel prices, export duty hikes on select steel products, and customs duty cuts for a host of commodities like coking coal, naptha, ferro-nickel etc. Besides, the government approved an additional expenditure of Rs 1.1 trillion for fertiliser and an LPG subsidy of Rs 200 per cylinder. This is to curb inflationary pressures. Thus, monetary and fiscal policies have moved in tandem and need to continue to do so.
A slightly positive outcome was reported in terms of the GDP growth for FY2022, which is estimated to have grown at 8.7%. Q4FY2021-22 GDP was recorded at 4.1%, lower than the 5.4% measured in Q3FY2021-22.
Fiscal and monetary policies must move in tandem
In the last policy, the MPC decided to remain accommodative while focusing on the gradual withdrawal of accommodation to support growth.
The stance will likely be “neutral” while the RBI will stay committed to bringing back inflation closer to the targeted levels through all possible instruments. The terminal repo rate is likely to settle anywhere between 5.50% and 6%.
Against this backdrop, I expect the RBI to increase rates between 35 and 50 basis points. Based on inflation data and external factors, including oil and commodity prices, there could be subsequent hikes of 25 basis points each.
Inflation and rate hikes could impact economic growth, particularly discretionary spending. India has primarily been a consumption-led economy, which is critical to support growth in the long term. I believe that the monetary policy alone is not sufficient to control inflation as this is not “demand-led” but supply shortages- and “cost push”-led to inflation. Fiscal and monetary policies must move in tandem to bring inflation within targeted levels and support economic growth. Thus, targeted government measures are required to control inflationary pressures and balance the growth-inflation trade-off.
(The author is group president – consumer banking, Kotak Mahindra Bank. The views expressed are the author’s own)