RBI MPC Meet Next Week: The Dilemma Between Growth and Inflation

Written By Srikanth Subramanian:

The RBI MPC is set to come out with its interest rate decision on October 6. The central bank kept the interest rates unchanged in the last policy decision in August, continuing its wait-and-watch approach. This time also, the RBI is expected to hold on to the rates. Inflation in August remained beyond the RBI’s upper tolerance limit at 6.83 per cent, but significantly lower than its peak of 7.44 per cent in July. This was largely on the back of an increase in global crude oil prices and high food inflation.

Core CPI, excluding food and fuel items, remained largely unchanged at 4.8 per cent in August (against 4.9 per cent in July) which highlights the point of stickiness in food inflation. Vegetable prices were the biggest contributor to the higher CPI inflation than the RBI’s tolerance limit of 6 per cent.

The Reserve Bank Governor-headed six-member Monetary Policy Committee (MPC) meeting is scheduled for October 4-6, 2023. The last meeting of the MPC, the highest rating-setting panel, was in August.

What will be interesting to observe is the tone that RBI Governor Shaktikanta Das uses in his address. In the last policy announcement, the governor sounded pessimistic about food inflation.

He highlighted that the central bank expects the food inflation to remain elevated at least till the end of the September 2023 quarter. While vegetable prices have eased a bit, cereals and pulses prices have been sticky. The central bank will most likely observe how the price trajectory evolves and, hence might not increase the rates given that the price trajectory till now has been more or less as per their expectations.

One of the major determinants of policy decisions in India is also a consequence of what happens globally. Fed Chairman Powell, although, did not hike the rate, he also didn’t change his hawkish commentary, rather in his Jackson Hole symposium address he clearly outlined the US Fed’s intent to raise the rates further if the inflation remains sticky.

CPI inflation in the US turned out marginally higher at 3.6 per cent whereas Core inflation was marginally lower, signalling the impact of energy prices. An increase in unemployment, fall in PMI, and decrease in consumer confidence along with the fact that the rates could be raised further sparked another round of recessionary fears in the US equity markets with both Nasdaq and S&P 500 losing upwards of 2 per cent in a week and US 10-year treasury rates climbing again. ECB, on the other hand, raised the rates by 25bps, however, signalled that it might be time to pause the rates considering core inflation has started to ease.

Coming back to India, Manufacturing activity has been good, with robust credit growth, healthy forex reserves, no upward revision in Fiscal Deficit and government borrowing thereon all point towards macro-economic strength. As far as liquidity is concerned, RBI is already managing that pretty well with M3 numbers largely unchanged. So, we don’t see sufficient reasons for RBI to make any moves as far as the interest rates are concerned.

Foreign rates also have a bearing on Indian interest rate decisions as well. So, if, let’s say, the US were to increase the rates further, the RBI would have to evaluate its strategy considering the fact that an increase of rates in the US and no change in India will lead to money flowing from India, creating issues both on forex reserves as well the currency front.

That, of course, is bound to have some sort of ripple effect. The impact on currency will have an effect on the trade balance for India and eventually on inflation as the import bill goes up. So, a lot remains to be seen on what stance global central bankers take going forward and how does the RBI make it an actual soft landing for India given that India has a lot to lose were the rates to rise too much. Growth in India has been largely resilient, any changes on the monetary front will pose risks to this growth rate. So RBI will have to bring out its finest in terms of balancing growth and inflation.

(The author is the CEO, Kotak Cherry. The views and opinions expressed in the column are personal and do not necessarily reflect the opinion of the organisation or the Kotak Group.)