Moneycontrol Pro Panorama | All eyes on rate verdict, but MPC is all too aware of over-tightening

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The trade-off between growth and inflation will come into sharper focus this week when the monetary policy committee of the Reserve Bank of India weighs its next move. The September quarter GDP data point to an impending slowdown. Worldwide, a few advanced economies are staring at a recession in 2023.

On the other hand, inflation hasn’t come under control yet. October consumer price inflation was 6.77 percent in India. Although a three-month low, it is higher than the upper end of the MPC’s target band.
Therefore, the rate-setting panel will have to consider how much output has to be sacrificed in order to curb inflation. As the minutes of the last meeting show, a couple of members of the panel are cautious about further tightening.

MPC member Ashima Goyal said the MPC must tread “very carefully” and that overreaction can be costly. Similarly, Jayanth Varma said it was “dangerous to push the policy rate well above the neutral rate in an environment where the growth outlook is very fragile”.

Be that as it may, there is still one problem area which the MPC will have to consider, argues Manas Chakravarty. That is core inflation. The purchasing managers’ index for November has shown strong growth and a pick-up in inflation in the services sector. That’s a recipe for higher core inflation and should weigh on the MPC’s decision, he writes. Read more here.

The RBI also has to ensure that the interest rate differential with advanced economies doesn’t widen too much which will then start telling on investment inflows.

All said, expect another 25-35 basis points hike in the repo rate. That sums up the expectation from the bond markets too, writes Churchil Bhatt, a fund manager.

“In our view, both the level of policy rates as well as banking system liquidity are fairly close to their respective neutral territories. Additionally, we expect the MPC to change its policy stance from ‘withdrawal of accommodation’ to ‘neutral’, reflecting that monetary policy has decisively moved beyond the pandemic era,” he writes. Read more here.

Investing insights from our research team

Bosch: Promising outlook, available at a reasonable valuation

Trent: Will the strong growth momentum continue?

NOCIL: What should investors do, given a subdued outlook?

What else are we reading?

Memo from PMI numbers to the MPC: Beware of core inflation

Is the market on a weak footing despite touching new highs?

Making sense of OPEC’s decision

Chart of the Day | Global food inflation heads for a fall

Ruchir Sharma: The easy money era is over but world leaders have not got the memo (republished from the FT)

Don’t write off Twitter just yet

View: Wait for the right entry points in the stock market

Technical Picks: Coal India, Federal Bank, Stride Pharma Science, Zinc and L&T Finance Holdings (These are published every trading day before markets open and can be read on the app).

Ravi KrishnanMoneycontrol Pro