Moneycontrol Pro Panorama: Searching for a pivot amid a heat wave of inflation

Inflation seems to be dominating the concerns. Searching for a policy pivot in these uncertain times is getting hard.

Dear Reader,

If you are looking for fresh insights into the minds of the six members of the monetary policy committee (MPC), the minutes of the April meeting will disappoint you. The arguments by all members follow patterns of the past, with the hawks steadfast on their inflation fear and the doves expecting price pressures to ease.

Both the Reserve Bank of India (RBI) Governor, Shaktikanta Das, and his deputy Michael Patra maintained their worry over inflation. Patra drove home the point that inflation above 6 percent is “inimically harmful” to growth. Das flagged off the potential pressures from output cut by OPEC+ and persistency in domestic core inflation. The RBI Executive Director, Rajiv Ranjan, echoed these, but also added that this is neither a premature pause nor a permanent one.

But the minutes don’t leave us high and dry. There seems to be an imperceptible change among the doves regarding inflation. This was a surprise as both Ashima Goyal and Jayant Varma, notable doves, seem to share the worry over inflation with the hawks.

Goyal and Varma believed that the best course of action is a pause because of fresh risks to inflation. Varma believes the OPEC+ output cut, and the upcoming monsoon are reason enough to wait and watch. “But because of erratic weather and continuing global uncertainties, and until it is clear that inflation is well on the path to reaching the target, it is necessary to emphasise that this may not be the end of the rate hikes,” Goyal argued.

This raises the odds of a long pause, but rate cuts don’t seem to be on the horizon for now. That said, Nomura’s analysts are expecting the RBI to begin slashing the repo rate as early as October. They are betting that the central bank’s optimism on growth won’t hold. “We expect a sharper cyclical slowdown due to the impact of the global slowdown, combined with the lagged impact of domestic policy tightening. Hence, we expect the policy pause will give way to a policy pivot towards rate cuts, starting this October,” they wrote.

A common risk among members is the erratic weather conditions that can impact output and prices of essentials, especially food. As a heat wave is engulfing parts of India, our columnist Subir Roy warns that economic growth would be hurt.

Heat waves have raised the risk of large-scale crop failures. That would hurt the rural households as part of their earnings comes from farming. Perhaps a harbinger of this distress is the recent increase in gold loans as our Chart of the Day shows. After all, the precious metal is the easiest to leverage during troubled times.

The upshot of all this is that the coming months would be critical for policymakers as they assess growth and inflation. So far, inflation seems to be dominating the concerns. Searching for a policy pivot in these uncertain times is getting hard.

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Aparna Iyer

Moneycontrol Pro