Untamed inflation ups slowdown unease
The RBI wants to see which way the wind blows. Just like the monsoon tracker, the central bank is now chasing inflation’s direction in the coming months. And until it makes a decisive turn (durable decline in price rise), the Monetary Policy Committee (MPC) is unwilling to pivot—where rate hikes end and rate cuts begin and vice versa. This explains the reason for the recent rate hike pause, but the MPC minutes released Thursday show members acknowledging the growth pangs. While external member Jayant Varma highlighted falling private consumption and moderation in corporate sales growth hindering investments, Ashima Goyal maintained her fearful stance on output sacrifice ratios likely being higher. Likewise, deputy governor Michael Patra noted that elevated inflation was beginning to hurt growth and that higher prices were ‘inimically harmful’ for growth.
Still, with its unwavering belief, RBI moderately raised its FY24 GDP projections by 10 bps to 6.5%. In contrast, the IMF lowered its estimates by 20 bps to 5.9% days after RBI’s upward revision. While the government continues drumbeats about India being the ‘bright spot’, the bitter truth is that signs of a slowdown are visible. As Goyal warned, further rate hikes could lead to the terminal rate overshooting the level needed for price stability. It means if it’s not high inflation, higher interest rates will likely continue the assault on growth. The first signs of stress come from housing loans. A recent TransUnion CIBIL CMI report showed a demand slowdown during the December quarter, thanks to higher inflation and rising interest rates.
As we know, growth, inflation and policy rates are joined at the hip. Ordinarily, the obvious solution for high or low inflation is to raise or reduce rates. But executing this seemingly simple solution is neither easy nor accurate during economic crises or uncertain periods. The biggest challenge is taming inflation without hurting growth, which few policymakers succeed in. While RBI continues its focus on durable moderation in inflation, multiple elements threatening price stability are beyond the remit of the central bank. Be it weather-related vagaries or our vulnerability to supply shocks amid OPEC’s production cuts and commodity price flare-ups, it is the government that must come to the rescue and cushion the impact of any anticipated supply-side inflationary pressures.