The stance of the Monetary Policy Committee (MPC) and its interest rate decisions must be data-dependent, according to Shashanka Bhide, one of the three external members on the Reserve Bank of India's (RBI) rate-setting panel.
"The stance and rate decisions would have to be dependent on data, especially as they relate to the future path of growth and inflation," Bhide told Moneycontrol in an interview following the release of the minutes of the February 6-8 meeting of the RBI MPC on February 22.
"At this point, we need to see a clear path to get closer to the target on the inflation front in the medium term. Taking into account the prevailing conditions, the recent rate increases have also been smaller," Bhide added.
While the MPC's first rate hike in the current tightening cycle was of 40 basis points (bps), it increased the repo rate by 50 bps in each of its subsequent meetings in June, August, and September last year. However, the quantum of the rate hikes reduced to 35 bps in December and further to 25 bps this month. One basis point (bps) is one-hundredth of a percentage point.
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Risks from food
The MPC's latest rate hike to take the repo rate to 6.5 percent and its decision to continue focusing on withdrawal of accommodation sparked fears that the repo rate may be increased again when the committee meets in early April, especially after Consumer Price Index (CPI) inflation jumped far more than expected to 6.52 percent in January, according to data released on February 13.
The rise in inflation in January was driven by a surprisingly large increase in the cereals index of the CPI. When asked about the same, Bhide pointed out that the rise in cereal prices was significant even in November and December.
"The rabi harvest would be a key factor, going forward. The sown area has increased and it is the weather conditions from now on that would determine the price conditions," he added.
On the whole, food prices remain a concern for Bhide, not just because of their influence on CPI inflation but also the adverse impact they have on the budgets of lower income households.
Crude and core
According to Bhide, an honorary senior advisor at New Delhi-based National Council of Applied Economic Research, crude oil prices will be the key determinant of price conditions in 2023-24.
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"The projected inflation rate for 2023-24 is subject to unexpected shocks and it may be an overestimate if oil prices remain low for long periods next year and the lower prices are passed on to domestic prices," Bhide said, referring to the RBI's forecast of 5.3 percent for next year's inflation.
A fall in core inflation, or inflation excluding the volatile food and fuel items, is important to return headline inflation to the target of 4 percent.
Core inflation has been sticky around the 6-percent mark for a prolonged period of time, which Bhide attributed to the multiple shocks that the economy has encountered over the last two years or so.
"Now that nearly all the sectors of the economy are operating free from the effects of the pandemic, the pass-through of the impact of the various price shocks should be complete. But the elevated level of prices has meant the persistence of high inflation," he explained.
Key quarter for growth
For Bhide, how the Indian economy performs in the next quarter will be important. "The growth in Q1 of 2023-24 is important for sustaining the momentum subsequently," he said.
While a normal monsoon will support growth even as it cools inflation, an improvement in the global economic environment in the second half of the year would push growth closer to the RBI's forecast of 6.4 percent for the year.
"Otherwise the growth forecast may be optimistic," he cautioned.
The RBI expects a GDP growth rate of 7.8 percent in the first quarter of 2023-24.
Bhide also warned that a sharp acceleration in manufacturing growth was unlikely in the short term. "Manufacturing growth will require growth in both consumption and investment demand. A number of policy initiatives have been implemented to improve the business environment for manufacturing," he said.
Asked to comment on the record capex target of Rs 10 lakh crore set by the Centre for next year, which has found both plaudits and sceptics, Bhide said the pace of infrastructure development in recent years owed a lot to government capex and strategies.
"These are essential for the virtuous cycle that leads to the acceleration in private investment, which depends on several other factors," he added.
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