For RBI the battle is still against the big I, will keep an 'Arjuna's eye on inflation'

For fiscal year FY23, headline inflation is pegged at 6.7 per cent, with Q3 and Q4 estimates set at 6.6 per cent and 5.9 per cent respectively.

Published: 07th December 2022 02:50 PM  |   Last Updated: 07th December 2022 02:54 PM   |  A+A-

Inflation

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Express News Service

If inflation is the necessary evil, the RBI positioned itself as the country's undefeated warrior.

Much like Arjuna, the fighter prince with superior battle skills and sharp thinking, the central bank on Wednesday stressed that it won't lose sight of the price stability target.

It delivered the good news and perhaps the first official confirmation, that the worst of inflation was behind us.

Yet, the battle was far from over as the moderation in prices is likely to be gradual and complete only after 2024. This is why, Governor Shaktikanta Das noted for the second time in the past month, that India's monetary masters are keeping an 'Arujna's eye on inflation.'

After hitting the 7.9 per cent peak, headline inflation eased to sub-7 per cent, but Das rammed home an unpleasant reality that price rise may remain above 4 per cent throughout 2023. For fiscal year FY23, headline inflation is pegged at 6.7 per cent, with Q3 and Q4 estimates set at 6.6 per cent and 5.9 per cent respectively. It'll likely moderate to 5 per cent and 5.4 per cent in Q1 and Q2 of FY24 respectively, with the normal monsoon being the caveat.

Given the above tolerance inflation print of 6 per cent for 10 consecutive months, the MPC raised the repo rate by 35 bps to 6.25 per cent, on Wednesday.

While the rate increase isn't unexpected, the moderation in the size of the hike from previous 50 bps hikes, serves as the fundamental guidance to MPC's thought process. That said, the rate hike isn't off the table and markets are expecting another 25 bps this fiscal before the central bank can take its foot off the rate hike pedal. Such a move will anchor the policy rate at 6.5 per cent -- 20 bps lower than the anticipated FY23 inflation print of 6.7 per cent.
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Given the geopolitical uncertainties and the 'forever war' in Ukraine, as Das noted in his post-policy press conference, there's no room for complacency and hence the MPC will remain 'watchful.' Moreover, core inflation continues to pressure the headline print and Wednesday's 35 bps hike appears as an attempt to break the core-inflation persistence.

As per estimates, the 190 bps hike so far (excluding Wednesday's 35 bps), resulted in a loan tenor increase of 13 years for home loan borrowers, and those who opted for an EMI increase saw payments shooting up by 20 per cent. Market watchers believe that as long as interest rates remain in single digits (under 9.5 per cent) the impact on housing will be moderate.

The weighted average lending rates on fresh and outstanding rupee loans increased by 117 bps and 63 bps respectively, as of October. On the deposit side, it's 150 bps and 46 bps, respectively.

This is the fifth consecutive rate hike since May, and we are so deep into the rate hike cycle, yet our policy stance is moored at 'accommodative' and contrary market expectations of the MPC shifting to a neutral stance, it remained focused on the withdrawal of accommodation. Das reasoned that system liquidity (which has been in surplus) increased from an average ₹1.6 lakh crore in November to ₹2.6 lakh crore as on December 5, forcing the MPC to remain focused on the withdrawal of accommodation.
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Meanwhile, the central bank lowered FY23 growth estimates by 20 bps to 6.8 per cent from the 7 per cent projected earlier. GDP will likely increase by 4.4 per cent and 4.2 per cent in Q3 and Q4 of FY23. Real GDP growth is projected at 7.1 per cent and 5.9 per cent in Q1 and Q2 of FY24.

The global economy is still marred by profound shocks and unprecedented uncertainty and the IMF projects over one-third of the global economy to contract this year or next. While no country is spared of the ill effects of such large shocks, emerging market economies have been the worst affected, the central bank noted.

The Indian economy remains resilient, our financial system remains robust. Bank credit is growing in double digits for 8 months now. Yet, inflation remains elevated and global spillovers continue to impart high volatility, it added.

When 2022 began, the Covid-19 pandemic was receding, and the Ukraine war overwhelmed the world in a black swan moment and fundamentally altered the global economic outlook. Inflation severely affected the poor and though prices moderated, inflation remains high and broad-based.
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