RBI Monetary Policy I Dice remains loaded for more rate hikes, chances of any cuts in 2023 dim

RBI Monetary Policy

Indranil Pan, Chief Economist at Yes Bank

Globally, inflation is seen to be coming off but is still at elevated levels. Consequently, with slowdown fears, global central banks have been slowing their pace of hiking rates. Many have already paused or may be pausing soon. Reflecting this broad trend, the RBI also decided to slow its pace of rate hikes to 25bps. However, the market was also expecting the RBI to signal a pause and probably also change the stance of the monetary policy. This has not been the case and the RBI said that it would continue to focus on the withdrawal of accommodation to ensure that inflation remains within the target range.

Akin to the policy statement of December, this monetary policy commentary also exhibited relatively greater uncertainty with respect to the inflation outlook than the growth outlook. The traditional fan charts put out along with the policy statement indicated a wider fan with respect to inflation than with the growth projections. However, for the inflation chart, the fan seems evenly distributed over the mid-point, thereby indicating that the risks are evenly balanced on the upside as also the downside, so far as the projections go.

Optimistic outlook

The commentary indicated that the business and consumers surveyed by the RBI were optimistic about the outlook. Rural consumption is expected to be boosted by the increase in the rabi acreage and assumptions of normal monsoon (that will determine the kharif acreage); urban consumption will get a push with the rebound in the contact-intensive sectors and higher discretionary spending.

Related stories

Indranil Pan

Chief Economist|YES Bank

• 
  RBI signals end of rate cut cycle; MPC flags growth risks from tariffs
• 
  Even after the RBI’s surprise move, Yes Bank’s Indranil Pan still sees the possibility of a 25 b...
• 
  Opinion: Setup becomes suitable for extended rate cuts by RBI MPC in June, August policy meetings

Also read: Lack of evidence | Modi can't be blamed for what’s happening with Adani, says Mark Mobius

The RBI also indicated that there are signs of additional capacity getting created in some sectors such as cement, steel, mining and chemicals. And credit growth remains strong. While the external sector and the weak exports could be a drag, RBI projects growth at around 6.4 percent, almost in line with the government’s forecast but higher than most other expectations on the Street. Our own model predicts a growth of 6.2 percent for FY24.

As indicated above, it is the inflation trajectory where the uncertainty lies. True, the inflation has moderated but this is driven by the “strong deflation in vegetables”. This, the policy statement, says may dissipate as we turn into summer.

Data from the Department of Consumer Affairs indicate that the normalisation of prices, especially of vegetables, has already started. Based on the advance information on prices, our model estimates the Headline CPI inflation to be at 6.4 percent for January (data to be released on February 13). The RBI also drew attention to the fact that Headline retail inflation excluding vegetables has been above the upper tolerance band and may also remain elevated.

Also read: SEBI seeks stricter norms for related party transactions by high-debt cos

Core inflation in focus

Importantly, and as was also the case during the last policy announcement in December, the focus for the policymakers continues to be core inflation. In an atmosphere where there is greater confidence in growth due to an expected upswing in domestic consumption and investment demand, the disinflationary pressure in the domestic economy is unlikely to be strong. Hence, even as the cumulative 250 bps policy rate hikes since May 2022 filter through the system, it is always pertinent for the central bank to keep a hawk-eye on inflation trends. In this context, the RBI will not be able to relax unless it sees a decisive move down in inflation and a durable disinflation process has set in.

Real rate is still lower

Unfortunately, the chances of Headline CPI inflation hitting the 4 percent mark in FY24 may be distant. RBI guides to an average of 5.3 percent and our model expect it at 5.2 percent. The guidance on the extent of the positive real rate that is desirable seems to be also changing. Previously, the RBI was looking at a 0.8-1.0 percent positive real rate. With the current repo at 6.5 percent and the average inflation for the next year projected at 5.3 percent, the real rate is positive by 1.2 percent.

The governor, however, pointed out that the real rate is still lower than that existing in the pre-pandemic phase. The only conclusion that can be drawn from this is that the RBI is telling the market that it is not yet done, and one should brace for further increases in the policy repo rate. Is this likely to come in April? Difficult to say – the RBI will see two more prints ahead of the Monetary Policy Committee meeting in April and will remain data driven. All said, the dice remains loaded for more rate increases and chances of any cuts in 2023 have almost vanished.

The writer is Chief Economist at Yes Bank.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.