Even as the Russia-Ukraine conflict brings risks of higher imported inflation and slower growth, the Reserve Bank of India may keep its monetary policy stance and interest rates unchanged in the upcoming meeting, economists said. In the MPC meeting, from April 6 to April 8, the RBI may ‘look through’ the elevated inflation, as it looks transitory, and may focus on stimulating domestic economic growth, economists added.
“The current bout of inflation is predominantly import-led and driven by supply side factors, where monetary conditions have little role to play. However, given the MPC’s likely assessment that the current volatility is rather transient in nature, the RBI may opt to continue to ‘look through’ the recent elevated inflation prints,” Rahul Bajoria, MD & Chief India Economist at Barclays, told FinancialExpress.com. “Indeed, the MPC may stress on the appropriateness of the use of fiscal levers such as tax cuts, increased subsidies to shield domestic prices from international prices,” he added.
“The poor WPI-CPI passthrough, uneven recovery and decoupling of India-US inflation dynamics will motivate RBI to hit a pause button on rates. The RBI would also want to get a clear picture of monsoon before going for a policy normalisation given its implication on rural economic recovery,” Sachchidanand Shukla, Chief Economist at Mahindra Group, said.
Double-whammy: High inflation, slow growth
“As the CPI is already (slightly) above the upper bound of the inflation target range of 6 per cent, in principle, RBI will have to raise the key interest rates (repo and reverse repo rates, keeping the gap between them constant). But the RBI may be hesitant to do so, as the pick up in output growth rate is still weak,” said R Nagaraj, Professor of Economics at Indira Gandhi Institute of Development Research. Inflation is expected to remain high in the March readings as well as a result of conflict in Eastern Europe.
Economists said the central bank may remain cautious in its approach towards policy tightening in order to support economic growth, which has not picked up yet. “My reading is that the MPC may hint at raising the rates later during the year, and avoid doing so this time,” R Nagaraj said.
Barclays also expects RBI stance to remain accommodative, but added that the central bank may hint at the need to narrow the policy rate corridor in the March meeting. ICRA said it expects the monetary policy stance to be changed to neutral in June 2022, accompanied by a hike in the reverse repo rate, narrowing the corridor. “Subsequently, we expect a shallow rate hike cycle, with two repo hikes of 25 bps each in August-September 2022,” ICRA added.
Price rise: Elevated inflation may ease in FY2023
Economists at Emkay Global and ICRA expect the central bank to raise its inflation expectations at the meeting. “In the April 2022 policy review, we expect the MPC to revise up its CPI inflation forecasts, whereas the growth projections for FY2023 would be pared. Nevertheless, the MPC is unlikely to sacrifice growth to control imported inflation,” Aditi Nayar, Chief Economist, ICRA said. “The MPC is likely to remain growth supportive for longer than other Central Banks,” she added.
Economist R Nagaraj said in the worst-case scenario, India may end up with stagflation, that is, output stagnation with the rising inflation. “However, If the domestic supply situation eases, as it appears to be happening, one can hope that the stagflationary situation can be avoided.”
Barclays also expects inflation to ease by the end of the year. “Overall, despite the likely breach of inflation target in the near term, our full year inflation projections put FY23 inflation at 5.1% y/y , which is well within the central bank’s target band,” Rahul Bajoria said.
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