The ‘recession’ dilemma of RBI
The minutes of the meeting of the Monetary Policy Committee, the panel of the RBI that decides short-term interest rates in India, mention the word recession only three times. Two months ago, the spectre of the recession was not as real as it is now after the US GDP contracted for two consecutive quarters. When the MPC sits again on August 3–5 to deliberate on interest rates, it would have to deal with two elephants in the room -- inflation and global recession.
About a couple of months ago, the general sense was that India’s economy was doing relatively good and could absorb the shock of the policy rate hike. Things have changed now. The RBI can no longer think of going all out against inflation, ignoring the possible shock to growth. And while analysts have more or less factored in a minimum 35 basis points hike in policy rates, the MPC might have a tough task ahead.
While the Indian economy faces no or minimal risk of recession, its growth potential is not immune to global recessions. Though most agencies still believe India might grow at over 7% in 2022–23, the rate of downgrades should be a cause of concern. The IMF recently cut India’s GDP forecast by 80 basis points to 7.4% in 2022–23. OECD has cut the India GDP estimates to 6.9% for the current financial year.
RBI has so far maintained India would grow at 7.2%. It would be interesting to see if it revises in the next meeting. The likely impact of GST rate hikes on inflation is what muddies the water further for the MPC. The Central bank was banking on the government’s many measures export duty on petroleum products (some of which have already been reversed) and metals, duty cut on petroleum products, and export restrictions on wheat—to ease the inflation pressures. But the recent GST rate hikes may fuel inflation in future. So, RBI has to fight the battle on multiple fronts -- inflation and recession. But given its clear mandate to keep inflation in check, could it lose sight of recession talks for some time and go the whole hog on inflation? We will know in a few days.