Inflation dips, time for RBI to Pivot?
Dear Readers,
Eyebrows were raised when the RBI governor Shaktikanta Das announced a pause on policy rate hikes in the central bank's Monetary Policy last week. Most analysts and economists had expected a rate hike given that inflation was much above the RBI's tolerance band of 6 per cent. The core inflation was sticky and the crude oil prices were rearing head again after being benign for some time. Analysts were also surprised as the RBI did not follow in the footsteps of the US Federal Reserve, which chose to hike rates despite staring at a banking crisis following the bust of Silicon Valley Bank and Signature Bank.
But just within a week of holding rates, the RBI may have been vindicated as retail inflation in India eased to 5.66 per cent in March from a much higher 6.44 per cent in February. Inflation sliding into its mandated 2 per cent-6 per cent comfort band for the first time in this calendar year should be good news for the RBI.
Meanwhile, the US Fed minutes released this week show many of its members batting for the status quo on rates till it gauged whether the banking crisis was contained. Their stance shows that India's central bank may have been right in standing pat. However, it is still a month's data and RBI governor Das was right in calling it a pause and not a pivot while justifying the central bank's move.
Sticky core
Though the fall in inflation has brought some respite, the central bank and the government have a daunting task ahead as the core inflation remains stubbornly high. It's pertinent to note that inflation levels have been driven by supply-side factors such as the cost of fuel, food, and fertiliser rising due to input costs in 2022. Consequently, businesses have been compelled to increase the prices of goods to protect their bottom lines. This poses a challenge to any attempts to tame inflation with monetary policy alone as it's a result of supply-driven factors rather than excessive aggregate demand.
A more tailored response is required, including a fiscal policy that alleviates the supply constraints. Even though the central bank cannot control weather or geopolitics, it can monitor how inflation in food and fuel affects the broader economy, as these two categories of goods account for well over half of the basket of goods that makes up the CPI. The oil prices have spiralled to over $85 per barrel following OPEC's move to cut production and any sustained rise will keep inflation high.
The RBI MPC has projected inflation for the first quarter of this fiscal at 5.1 per cent, 5.4 per cent for the second and third quarters and 5.2 per cent for the fourth quarter, which is much more than the desired 4 per cent. So, it may not be all clear on the rate front.
Growth pangs
While inflation firefighting may still be in the play, renewed growth worries are surfacing.
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The private weather forecaster Skymet prediction of a shortfall in rains during monsoon due to El Nino formation has sparked fears of drought and rural distress. The International Monetary Fund sees India's growth falling below 6 per cent this year. Many big economies are also likely to post sub-par growth this year hurting India's exports.
Meanwhile, the spectre of drought and fall in March inflation has brought out the doves. Economists now expect the RBI to hold rates and even start cutting them in the later part of this fiscal. The pivot towards easing also augurs well for retail borrowers and India Inc, which have been a strain on their finances due to the rate hikes.
In this scenario, the RBI and the government have a task cut out to balance the need to control inflation while protecting growth. There are interesting times in the year ahead.
Apart from this, we filed a couple of stories on recent developments this week. I am adding the top five of them here for your reference. Trust, you will find them meaningful.
Happy Reading,
Amol Dethe
Editor
ETBFSI
Sales Associate at Microsoft
1yThanks for posting
Chief Financial Officer
1yChief Editor Amol Dethe Ji, Thank you for a very nice article in the form of a editorial letter referring to the top 5 stories. With the above article of yours, they are 6. As you rightly stated, RBI is vindicated. May be, RBI could consider a pivot than a pause and look at paring rates gradually. But the oil prices need to be watched out for. Thank you for your nice analysis, series of editorial and journalistic articles. Your team deserves a great appreciation for covering every aspect that is worth reading and with updated brief statistics embedded into the stories. Thanking You - Dr.Kishore Nuthalapati