Surprising RBI decision to drop QI forecast for FY24
The RBI’s 50 bps repo rate hike was indeed a ‘no-brainer.’ What’s mind boggling, though, is the things the central bank left unsaid. Foremost among them is headline inflation, the forecasts for which were revised upwards by a disturbing 100 bps to 6.7% for FY23. It’s only logical to expect updated estimates for next fiscal as well, but RBI refrained from publishing Q1, FY24 forecast, tossing its own age-old practice into the bin. The other pertains to policy stance on rates, which too was abandoned, perhaps for the first time in RBI’s history. It could be a one-off instance given the Monetary Policy Committee (MPC) is well within its rights to break ‘stereotypes and conventions’, but in reality, the central bank’s reading is all the more essential in these uncertain times.
That inflation will breach RBI’s upper tolerance band of 6% for a second time in two years is somewhat anticipated given the steady rise in inflation for four months straight. The quarter-wise breakup shows price rise of 7.5% in Q1 and 7.4% in Q2. In all likelihood, we will hit peak inflation and be done with it by September. But we can’t let our guard down because, even if retail inflation will likely cool down to 6.2% and 5.8% by next March, it’s still dangerously close to the 6% breaching point. This is where FY24, Q1 estimates would have come in handy indicating the direction of price stability. Likewise, Governor Shaktikanta Das brought the ultra-low-rates party to an end in April, putting pedal to the metal without even uttering the word ‘tighten,’ but to not publish the policy stance altogether is baffling. More so, when further rate hikes seem to be as sure as night follows day.
As for the hotly debated positive real rates, it’s critical to know where the peak repo rate will be anchored. SBI Research pegged it at 5.5%, leaving the scope for further 60 bps rate hikes. But this leaves both savers and borrowers unhappy, as deposit rates will remain in negative territory, while loan rates have already begun moving up.