What will be the RBI Monetary Policy Committee decision today?

The RBI, led by Governor Shaktikanta Das, has been ahead of the curve on fine-tuning both the price and size of the money in the economy

The monetary policy committee (MPC), which sets the interest rates in India, will start its 3-day meeting on December 5. The MPC will likely announce another 25 basis points (bps) to 35 bps rate hike on Wednesday. The reason is obvious. Threats from a persistently high inflation, which has remained above target for ten consecutive months, has not vanished yet. It could be too soon for the panel to lower the guard on price rise. But, this could very well put an end to the current rate hike cycle. There have been too many rate hikes back to back in the second half of the year that has made borrowings expensive, affecting rural demand. The rate hikes have to stop at some point and time may be just right for that.

Also Read: Should the MPC give one more rate hike for the road before resting?

In this context, what is important to watch this time—more than the expected rate hikes itself—could be the change in stance. The MPC’s current monetary policy stance is ‘withdrawal of accommodation.’ This is widely expected to change to ‘neutral’. Why is this significant? A change into ‘neutral’ will be the first signal of the end of a rate hike cycle. Withdrawing from accommodation simply means high possibility of a rate hike. A neutral stance simply translates into wait and watch mode.

The MPC has hiked rates by nearly two percentage point in this rate hike cycle in four tranches to fight inflation that has persistently stayed high snatching away the fruits of economic growth from the rural households. There is already a strong call within the MPC for a pause.

Also Read: Base effect led fall does not mean the start of inflation easing cycle

For instance, the minutes of the MPC meeting held on September 28-30 showed strong arguments from member Jayanth Varma in terms of a pause after nearly two percentage rate hikes in four months. Varma argued that too much rate tightening will hamper the nascent recovery seen in economic growth.  “In my view, it is dangerous to push the policy rate well above the neutral rate in an environment where the growth outlook is very fragile,” Varma said.

This time, it is likely that more members could support Varma’s stance and say that rate hikes can take a pause to give a chance to growth recovery. On growth-front, things aren’t exactly rosy. India's Q2 GDP more than halved to 6.3% in from the 13.5% which was reported in April – June as base effect faded. India has not yet  got back to its desired growth momentum.

On the other hand, the unemployment is on the rise. According to CMIE, unemployment rate in November shot to 8 per cent, indicating that number of jobless people among the workforce is increasing at a faster pace. This level has risen in previous months to 7.77 per cent in October from 6.43 per cent in September. High inflation and unemployment are hurting the rural economy, in turn hurting the consumption demand.

Just last month, the Nielsen IQ’s FMCG Snapshot for Q3 of 2022 showed that rural volumes have recorded a decline of 3.6% in the September quarter, even bigger fall than 2.4% in the April-June quarter, marred by inflation and unseasonal rains. What this means is that falling consumption could hurt businesses and creates further drag on growth. That apart, rising unemployment will have cascading effects on the banking sector as well as loan repayments will get delayed. Without doubt, the focus of the MPC at this stage should move beyond inflation fight towards supporting growth