RBI wary of core inflation despite easing signals
The RBI’s inflation hawks are in no hurry to retreat. Markets expected the central bank to either take the foot off the rate hike pedal or change the policy stance to neutral. Wednesday’s bi-monthly policy review delivered neither. Further, as market expectations went one way, RBI walked another. Far from considering a pause, Governor Shaktikanta Das even kept the door open for another rate hike. This was least expected. Headline inflation is easing, which even the RBI’s Monetary Policy Committee (MPC) acknowledged and duly lowered the forecasts for Q4 of the current fiscal, full fiscal FY23 and even for FY24. Yet, Das is unwilling to take his eyes off the inflation ball. Unlike global central banks, he even refused to provide forward guidance, terming it counterproductive.
The RBI seems adamant for two reasons. One, core inflation, excluding food and fuel prices, remains sticky. As Deputy Governor Michael Patra noted, core inflation indicates excess demand, and although it’s moderating, the decline isn’t at a pace the RBI would like it to be. So future rate hikes or pauses will depend on how this component evolves from here on. Two, the most important, is the uncertainty surrounding the global macro economy. The past three years saw successive shocks, each with ‘unprecedented suddenness and spillovers’, from which major economies are yet to recover. Having weathered the non-stop storms, the MPC may want to avoid a premature pivot. This may well turn out to be RBI’s prescient call, but then, luck can run both ways.
The 250 bps rate hikes announced till now are arriving in slow motion, as they often do. But one can touch and feel its full impact only from next year. By this point, the economy would have recouped the lost ground. For now, the RBI has occupied the front row of the growth cheer squad, revising forecasts upwards to 7 per cent this fiscal and 6.4 per cent next. This is higher than even the Ministry of Finance, which stuck to conservatism. Barring exports being a drag on the economy and unexpected global shocks, the India growth story seems unstoppable. But with the overnight repo rate at 6.5 per cent and taking the December inflation print of 5.7 per cent, the real policy rate has moved into positive territory at 0.8 per cent. Some believe that further rate hikes pose an unwarranted risk to growth unless inflationary pressures re-emerge. The MPC should take note of it.