The outcome of this monetary policy should not be discussed much, as it was in line with the forecast. Nevertheless, the governor’s comments highlight some very important points. First, there is an acceptance that risks are stabilising, becoming more manageable, and there is greater certainty for economic outcomes from policy moves. This indicates that the risks of any sudden policy change are low. With the policy environment becoming more stable and demand expected to improve in both urban and rural areas, we should see a recovery in private investment. It argued that the twin balance sheets of both corporates and banks are healthy, and this creates perfect conditions for a ramp-up in private investment.
This implies that India’s growth story should be relatively stable and sustainable. With the slowing effect of monetary policy playing out in the system and its “full impact” being felt in the coming months, inflationary pressures must be kept in check: the right growth-inflation mix. The implication is that any rate hike is too high to make up for it. That the inflation battle is far from over for the world. Markets expect the US Fed to raise interest rates further, possibly after a pause in June. Expectations are also strong for the ECB and BOE to raise rates twice. We also have examples where the Australian and Canadian central banks were halved but have had to go back into the hiking cycle. In my opinion, the risk for India is very low.
Thus, most likely, the next move by RBI will be a cut, but the timing is the big question. And this is where we see the governor maintaining a bullish undertone on forward guidance. There is repeated emphasis on the fact that the alignment of headline CPI inflation will now have to be in line with the 4% target and that the RBI will not be satisfied with inflation falling within the tolerance band. The flexible inflation targeting mechanism was used during stressful times and now, with better clarity on economic outcomes, the focus has returned to the original target of 4%. Further, for the Reserve Bank of India, a durable deflation in the core would be desirable to align inflation to the target of 4%.
And achieving the target of 4% in FY24 may not be a reality. Q1, Q2, Q3, Q4 FY24 RBI’s inflation expectations are 4.6%, 5.2%, 5.4% and 5.2% respectively with assumptions of normal monsoon. The Australian Bureau of Meteorology’s ENSO outlook has now been changed to “Alert” status (from earlier “Watch” status), with a 70% chance of El Niño forming and disrupting the southwest monsoon over India. This is a potential risk to inflation. Long-term risks include geopolitical concerns (implications for commodity and oil prices), globalization (implications for lower global trade volumes), global aging population (reliance in current consumption as a structural inflation risk for the world increases with increase in ratio) remains as , The governor says “the last leg of the journey is the most difficult”. Thus, their statement of “pause and not pivot” at the April meeting continues, meaning that any thoughts that the market might start in terms of an initial rate cut are now out the window. Given the inflation trajectory, the RBI is expected to be on an extended pause during FY24.
Indranil Pan is the Chief Economist at Yes Bank Limited. Thoughts are personal.
catch all business News, market news, today’s fresh news events and Breaking News Update on Live Mint. download mint news app To get daily market updates.
Updated: June 08, 2023, 10:16 PM IST