FM Sitharaman on RBI rate hikes: With inflation falling, pressure on MPC to keep hiking rates now less

Finance Minister Nirmala Sitharaman

Ahead of the monetary policy review slated next week, Finance minister Nirmala Sitharaman on February 3 said with inflation falling on a sustainable basis, the pressure on the Reserve Bank of India (RBI) and monetary policy committee (MPC) 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,” Sitharaman said in an exclusive interview to Network18.

These comments from FM come at a time when the RBI has hiked key rates by 225 bps since May last year to fight persistently high inflation.

Additionally, it is important to recall that the RBI wrote to the government in 2022 after it failed to keep the inflation within the 2-6 percent limit for three consecutive quarters. Under the rule, the MPC needs to keep inflation at a 4 percent target with an error margin of 2 percent on either side.

The MPC is expected to hike the repo rate, at which the RBI lends short-term funds to banks, by another 25 bps in its February review.

After staying above the 6 percent upper band for nearly a year, the 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 the previous month. 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 CPI inflation has fallen. It is also the second month in a row that it has come in lower than the upper bound of the Reserve Bank of India's (RBI) 2-6 percent mandate. With inflation beginning to ease on a sustainable basis, the central bank may have reached the end of the current rate hike cycle, economists said.

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The RBI's monthly bulletin released on January 19 said that with retail inflation falling below the 6 percent upper band in recent months, the first milestone of India's MPC is passed.

Subsequently, India's economy has seen improvement in macroeconomic stability with inflation being brought into the tolerance band and lead indicators suggesting the current account deficit is on course to narrow, according to the January Bulletin.

While a slowdown in growth with possibilities of recession in large swathes of the global economy has become the baseline assessment, emerging markets are appearing more resilient than in the year gone by, but their biggest risks in 2023 stem from US monetary policy and the US dollar, the RBI Bulletin said.

In January this year, RBI Governor Shaktikanta Das said that taming inflation is one of the key policy priorities and it is too early to revisit the inflation target of 4 percent with 2 percent deviation on either side, in the current situation.

“I don’t think there is any need for any change. I would not think the target needs to be revisited,” RBI's Das said at an event in Mumbai. “It is too early to shift the goalpost. The 4 percent target has a certain meaning,” Das said.

According to the Governor, the flexibility of the inflation framework facilitated the maintenance of the average CPI from 2016 to 2020 and kept it around 4 percent.

Core inflation still remaining sticky over six percent is definitely a concern, Das said. “That is not a comfortable number to deal with,” Das said, adding the RBI needs to be very vigilant on core inflation. At the moment, we have to continually focus on core inflation, the governor added.