No Pause In Sight: A 25-BPS Rate Hike In Feb Not Ruled Out

There are no surprises in the Reserve Bank of India’s (RBI’s) latest monetary policy, the last for calendar 2022. The repo rate has been raised by 35 basis points (bps), which is par for the course -- as I had mentioned in my Monday’s “Banker’s Trust” column.

All eyes have been firmly on the future guidance. Is the rate-increase cycle of the RBI’s Monetary Policy Committee (MPC) – which started in May 2022 and has raised the rate from 4 per cent to 6.25 per cent to fight entrenched inflation – over? Certainly not.

To support this, many are quoting para seven of Governor Shaktikanata Das’s statement.

“On balance, the MPC was of the view that further calibrated monetary policy action is warranted to keep inflation expectations anchored, break core inflation persistence and contain second round effects. These actions will strengthen the medium-term growth prospects of the Indian economy.”

But this refers to the MPC’s approach to the current situation and explains why it has gone for a rate increase (in a 5-1 decision). It doesn’t explain the future outlook.

Should we expect a pause at the next MPC meeting in February? No. Look at para 15 of the statement:

“GDP growth in India remains resilient and inflation is expected to moderate; but the battle against inflation is not over. Pressure points from high and sticky core inflation and exposure of food inflation to international factors and weather-related events do remain. While being watchful of the impact of our earlier monetary policy actions, we will keep Arjuna’s eye on the evolving inflation dynamics and be ready to act as may be necessary….”

Yet another para of the governor’s statement sums up the RBI’s future plan of action – para 30.

"The course of our future policy will duly consider new data releases and the evolving outlook of the economy as well as the effect of our past actions."

The RBI has dialled down to a 35-bp rate increase after a series of three 50-bp hikes. Another 25-bp increase immediately after the Union Budget – the last before the 2024 general elections – will not be surprising.

By that time, the RBI will have the November and December retail inflation data on the table. Also the mid-December and early-February rate actions of the US Fed will have an impact on the MPC’s call.

The last time we saw India’s policy rate at 6.25 per cent was in February 2019. Announcing a cut from 6.5 per cent to 6.25 per cent, the governor had expected the inflation to remain below or at 4 per cent.

In February 2019, inflation was 2.57 per cent, higher than the previous month’s 1.97 per cent. It rose to 2.86 per cent in March. It had been estimated at 3.2-3.4 per cent for the first half of 2019-20 and 3.9 per cent for the third quarter.

Can the RBI stop at 6.25 per cent when inflation is projected at 6.7 per cent for 2022-23? It has left the annual inflation estimate unchanged but tweaked its quarterly projections – 6.6 per cent for the third quarter and 5.9 per cent for the fourth, with risks evenly balanced. Inflation is projected at 5 per cent for the first quarter and 5.4 per cent for the second quarter of next financial year, “on the assumption of a normal monsoon”. 

To ensure a positive real rate, the policy rate may need to be raised to 6.5 per cent before a pause.

The day after the World Bank raised India’s 2022-23 growth forecast from 6.5 per cent to 6.9 per cent, a pragmatic RBI has lowered it to 6.8 per cent from 7 per cent “with risks evenly balanced”. It has concerns about growth, to secure which it wants to bottle the inflation genie. The key takeaway from the governor's 3,000-word statement is “the battle against inflation is not over”.

While the action is in sync with market expectations, can we call Das a hawk?

I remember a January 2014 conversation between the then governor Raghuram Rajan and deputy governor Urjit Patel. After Rajan surprised the market with a rate increase, he explained the policy stance by saying: "We are neither hawks, nor doves. We are actually owls." Patel chipped in: "We are vigilant when others are resting."

It’s reassuring to see Das remaining vigilant as ever. Of course, no other central bank is resting, either.

This column first appeared in Business Standard 

The writer, a consulting editor with Business Standard, is an author and senior adviser to Jana Small Finance Bank Ltd

His latest book: Pandemonium: The Great Indian Banking Tragedy   

To read his previous columns, please log onto https://bankerstrust.in

Twitter: TamalBandyo