RBI may end rate hikes by year-end, inflation may ease to 5% next year: CRISIL’s Dharmakirti Joshi

It was largely a volatile session but there was a recovery in last hour of trade which helped the benchmark indices extend uptrend for eighth consecutive session on August 18, driven banking & financial services stocks.

The Reserve Bank of India (RBI) may end its monetary policy tightening cycle by the year-end as inflation is expected to trend downwards in the months ahead, the chief economist at CRISIL Ltd said.

“As far as monetary tightening is concerned we are probably getting closer to the end of the cycle if the inflation behaves the way it is projected to,” Dharmakirti Joshi said in an interview with Moneycontrol. “We do see a 25 basis points rate hike in September and possibly another one before the end of this year. That probably will be the peak of repo rate.”

The RBI’s Monetary Policy Committee (MPC) had slashed the key policy rate to a record low 4 percent in the wake of the pandemic to help the economy face the national and regional lockdowns. As part of its pandemic relief measures, the central bank had infused hefty liquidity into the financial system, allowed a one-time moratorium on some loan repayments, permitted certain loans to be restructured and launched an unprecedented government bond purchases programme.

Most of these measures came with sunset dates and were gradually unwound.

However, the recovery has been uneven despite the pandemic gradually waning after a deadly second wave in 2021 as global supply chain disruptions and Russia’s invasion of Ukraine have led to a surge in crude oil, gas and food prices.

Still, the MPC saw through the supply-side-led spike in inflation for nearly two years, and only applied the brakes recently by hiking the key policy rate by a total of 140 basis points since early May.

Inflation cools

Consumer price index (CPI), or retail inflation – the rate-setting panel’s key price gauge - has been above the inflation target of 4 percent for 34 consecutive months and outside the 2-6 percent tolerance range for seven straight months.

It has now started edging down due to a fall in global commodity and food prices recently and interventions by the government, which has taken a raft of measures to ease input and food costs.

“The inflation control that we are seeing right now is the result of some favourable developments globally, particularly for edible oils, etc,” CRISIL’s Joshi said. “Fiscal policy has played an important role because this inflation is more supply side.”

Meanwhile, RBI’s rate hikes have started bringing down inflation expectations and will help in controlling the second-round impact of higher commodity prices going ahead, he added.

CRISIL forecasts retail inflation at 6.8 percent in this financial year, a tad higher than RBI’s projection of 6.7 percent.

A global growth slowdown could pressure crude oil and commodity prices further, lowering price pressures.

“Inflation will start coming down, by the last quarter you will see inflation below 6 percent. When it will touch 4 percent I don’t think it is not easy to predict that right now in this environment. There are so many moving parts,” CRISIL’s Joshi said. “But my sense is next year average inflation is going to be around five percent.”

The risks to inflation trajectory this year come from the food prices and sticky core inflation, which could see further pressure as companies continue to pass on the input cost increases and as services costs rise, he added.

Growth prospects

Joshi expects contact-based services like hospitality, and tourism to be the primary drivers of the estimated 7.3 percent growth this financial year.

These sectors were among the most hard-hit during the two years since the pandemic but have now bounced back.

Meanwhile, manufacturing activity has been somewhat resilient and the government’s infrastructure push will also support growth. Despite concerns over patchy monsoon rainfall affecting the summer-sown crop, Joshi does not see a major hit to GDP from agriculture.

For the next fiscal, the lagged impact of the monetary policy tightening could impact growth as could the slowing global economy. CRISIL currently projects growth for 2023-24 at 6.5 percent with a downward bias.

“This is a period in history where we have got multiple global shocks and shocks which are also altering the global geopolitics. So a lot depends on how the situation unfolds. For now, it has injected a lot of uncertainty on what could happen over the next couple of years.”

Medium-term outlook

Over the medium term, the story is very different from the one playing out right now, Joshi said.

The higher multiplier effect of the government’s infrastructure capex will have an impact over a period of time. If the capex momentum sustains, it will also raise the potential of the economy.

The infrastructure boost will make conditions for private investment more conducive even as private capex will be frontloaded through the production-linked incentives, Joshi said.

In the base case, CRISIL has a range of 6.5 to 7 percent GDP growth for over the next five years.

The risks, again, are largely global.

If the global cycle turns, the ability of many countries to support their economies would have reduced as central banks’ balance sheets have ballooned and debt levels are pretty high.

“The policy tools are crimped. We could be entering into a phase of sub-optimal growth globally, particularly in advanced countries. If that happens, I think that would spill over to us,” Joshi said.

Finally, India’s private consumption story has been somewhat weaker.

“Will investment and consequent improvement in economic activity trigger another virtuous cycle? We will have to wait and see.”