Peak impact of rate hike on growth will be felt in last quarter of this fiscal: Crisil’s Dharmakirti Joshi

Inflation could tread a notch below 6 percent in the fourth quarter of this fiscal, but monsoon and geopolitical developments’s impact on commodity prices will need to be watched closely, said Dharmakirti Joshi.

The chief economist of Crisil was commenting on the latest Monetary Policy Committee (MPC) meeting, in an interview with Moneycontrol.

The impact of the rate hike on growth is felt with a 3-to-4 quarters lag, so the peak impact of the tightening can be seen in the last quarter of this fiscal and in the first quarter of the next, he said.

On inflation moderating by the last quarter, he said, “normal monsoon is expected to augur well for kharif production and ease food prices in the second half of this fiscal. (That said) the spread and intensity of rains will be the key monitorable". A high base from the fourth quarter of last fiscal will help bring down the headline number, he added. CPI inflation averaged 6.3 percent in Q4FY22.

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The Reserve Bank of India Governor Shaktikanta Das, who chaired the MPC meeting, has said that inflation will remain above its target range for the first three quarters in FY23–7.5 percent, 7.4 percent and 6.2 percent--and moderate to 5.8 percent in the fourth quarter. If inflation breaches the targeted range of 2-6 percent for more than three quarters, the central bank governor has to give an explanation to the government and present a plan on how to bring it back on track.

At the June 8 meeting, the MPC raised the repo rate by 50 bps to 4.9 percent.

External sector

The tightening by the central bank will help reduce the pressure on the rupee from a widening the current account deficit (CAD) and stem foreign portfolio outflows, he said. So far, the rupee has weakened 4.3 percent since the start of 2022, compared with 12.9 percent during the ‘taper tantrum’ of 2013, he added.

According to Joshi, India’s external vulnerability–though lower than what it was during the taper tantrum–has started increasing. The rise in crude prices–from $85.5 per barrel in January to over $120 per barrel at present–has “significantly worsened” the outlook on India’s current account, he said. The country’s CAD rose to 3 percent of GDP this fiscal, the highest since FY13.

 “While India’s foreign exchange reserves remain adequate, they are reducing with RBI’s efforts to reduce pressure on the rupee,” he said. 

Meanwhile, with central banks across the globe raising interest rates, foreign investors have started pulling out from India in large numbers. If major macros, such as inflation and growth, worsens then investor sentiment can weaken further, especially among short-term investors such as foreign portfolio investors, he said.

Capex revival

The tightening’s effect on capex growth doesn’t seem like an immediate concern.

“Uncertainty, rather than interest rates, could delay private investment,” he said.

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The tightening will begin to weigh on growth only towards the end of the year, according to him. "The real policy rate is still negative," he added.

Meanwhile, there are positive signs in the economy. “Rising capacity utilisation is a positive for revival of the capex cycle. The private sector is primed up for investments because of a better financial profile and low leverage. Sectors such as Steel/metals and cement are already seeing some action on the investment front. In addition, greening of investment will continue,” he said.

“Government’s focus on infrastructure creation continues but there could be some set back due to additional spending on subsidies,” he added.