The six-member MPC of the Reserve Bank of India (RBI) believes that the inflationary trajectory is uncertain given the likely negative impact of a deficient monsoon, showed the minutes of April MPC meeting published Thursday.
Yet, there are expectations that inflation would remain under control if the next crop output doesn’t shrink or cause a spike in food prices despite a favourable base effect.
Softening in global commodity prices and positive real interest rates that now ensure returns in excess of one percentage point should shorten the odds on the second successive status quo in rates when the RBI panel meets early June.
‘Lower input cost pressures’
“The softening of global commodity prices from their peak levels a year ago is translating into lower input cost pressures for manufactured goods and services,” Governor Shaktikanta Das was cited as saying in MPC minutes.
On April 6, the MPC surprised the markets with a unanimous vote in favour of a status quo in policy rates – the first such move since last May. Two members dissented on the vote on the MPC’s stance, which was to remain focussed on withdrawal of accommodation. Governor Das, however, was quick to point out that the decision on rates pertained only to that meeting and didn’t indicate future actions.
Yet, the minutes suggest another ‘pause’ decision is not unlikely.”The MPC’s latest minutes highlight some convergence on concerns over global risk factors, but some divergence over the balance of risks on inflation,” said Rahul Bajoria, MD & Head of EM Asia (ex-China) Economics, Barclays. “However, with moderating inflation, the bar for another rate hike seems very high, and we think the hiking cycle is effectively over.”
Positive real rates
The central bank has raised rates by 2.5 percentage points in six consecutive policy reviews over the past 11 months, helping restrain inflation and allowing returns from the repurchase rate – adjusted for consumer inflation – by at least a percentage point. Real returns in excess of a percentage point are seen by market experts as sufficient cushion for policymakers to go easy on the cost of funds.
“Since the inflation forecast for FY24 is 5.2%, with the fourth-quarter at 5.2%, a repo rate at 6.5% implies the real policy rate is greater than one,” Ashima Goyal, external member, was cited as saying in the MPC minutes. “It has already tightened enough to progressively bring inflation toward the target of 4%, with other complementary policies and barring major new shocks. A further rise in real interest rates is best avoided at present since high real rates can trigger a non-linear switch to a low growth path.”
The MPC needs to keep a careful watch on the evolving crude price situation.
“If crude were to creep toward the triple digit mark, there might be a need for a monetary response,” said Jayanth R Varma, professor, Indian Institute of Management, Ahmedabad, and an MPC member.
“Furthermore, deficient monsoons would likely create inflationary pressures that would need to be counteracted with monetary policy measures,” Varma said. “We will, however, have to wait until May or even early June to have reasonable clarity on this matter.”
But the best estimate currently is that 3.15 percentage points of effective tightening in the overnight interest rate (from a reverse repo rate of 3.35% to a repo rate of 6.50%) would be quite sufficient to restrain inflation, said Varma, who voted for a ‘pause’ in rates.
To be sure, even internal members on the rate-setting panel defended the decision to pause rates.
“The cumulative impact of our monetary policy actions over the past one year is still unfolding and needs to be monitored closely,” said Governor Das.
Eye on inflation
Inflation for FY24 is projected to soften, but the disinflation toward the target is likely to be slow and protracted. The projected inflation in Q4 of FY24 at 5.2% would still be well above the target of 4%.
“Therefore, at this juncture, we have to persevere with our focus on bringing about a durable moderation in inflation and, at the same time, give ourselves some time to monitor the impact of our past actions,” Das said.
Deputy Governor Michael Patra said the MPC must be ready to act pre-emptively if risks intensify to both sides of its commitment: Price stability and growth.
“While I vote for a pause in this meeting, an ongoing assessment of the macroeconomic outlook should inform a preparedness to re-calibrate monetary policy toward a more restrictive stance with consistent actions, should risks to the inflation trajectory materialise and impede its alignment with the target,” Patra said.
Analysts believe the unchanged stance reflects the panel’s flexible approach toward rates should inflation unexpectedly accelerate.
“We think the two most hawkish members of the MPC through the current cycle – Governor Das and Deputy Governor Patra – remain relatively hawkish, focusing on the pause in the cycle and not stop, given the war against inflation needs to continue,” Barclays’ Bajoria said. “The hawkish tone and the optionality to hike more was reflected in the stance, which was maintained as ‘withdrawal of accommodation’.”
