Banking Central | FM Sitharaman just nudged RBI to prioritise growth, without saying it

Finance Minister Nirmala Sitharaman (File Image)

If the Monetary Policy Committee (MPC) was waiting for another reason to slam the brakes on interest rate hikes, then it just came from Union Finance Minister Nirmala Sitharaman on February 3.

During Network 18 Group’s exclusive interview with the FM after the unveiling of Budget2023, Sitharaman said that with inflation falling on a sustainable basis, the pressure on the Reserve Bank of India (RBI) and its Monetary Policy Committee (MPC0 to hike interest rates has now eased. “I expect since the fall in the inflation doesn’t seem to be just a momentary or a one-month affair, it should sustain itself in the process of coming down and therefore there shouldn’t be that much pressure on the central bank to keep the pace of increasing the rates but the MPC will take a call, of course,” she said.

This is important. If one reads between the lines, this is a powerful nudge coming from the North Block to Mint Street to get the focus back on the growth front by ending the rate hike cycle that began in May last year. But, in fact, even before the FM pitching for a growth-supportive accommodative stance, if one looks at the numbers, the central bank has had strong reasons of late to ease the policy tightening course. Inflation has been easing in the last three months and there are fresh concerns on the growth front. Also, the rate-setting panel has done its bit quite aggressively.

The MPC has cumulatively hiked the repo rate, or the key policy rate at which the RBI lends short-term funds to banks, by 225 basis points in a bid to control inflation. One basis point is one hundredth of a percentage point.

On the other hand, as mentioned above, inflation has begun to ease. After staying above the 6 percent upper band for nearly a year, India's retail inflation started falling later last year, providing comfort to the monetary policymakers. The CPI inflation eased to a one-year low of 5.72 percent in December from 5.88 percent a month back. At 5.72 percent, the latest Consumer Price Index (CPI) inflation print is below the consensus estimate.

This is the third month in a row that the CPI inflation has fallen. It is also the second month in a row that it has come in below the 6 percent upper band of the RBI’s mandate. With inflation beginning to ease on a sustainable basis, the central bank may have reached the end of the current rate hike cycle.

That said, while the headline inflation number has eased, one concern that remains is the persistently high core inflation that remains above 6 percent. But there is a point beyond which the MPC cannot hold on to inflation targeting.

India is expected to grow slower at 6.1 percent in 2023, compared with 6.8 percent in 2022, according to IMF. At a time of recession worries raging across the globe, particularly in the US, It is important for India to focus on growth revival before it is too late. And the only way the central bank could do that is by stop making borrowings costlier.

However, by the central bank’s own admission, the inflation fight isn’t over yet. It could extend to one more rate hike and perhaps end the cycle at that point there. The RBI will likely increase the repo rate by another 25 bps this week and that will mark a shift.

Banking Central is a weekly column that keeps a close watch and connects the dots about the sector's most important events for readers