The status quo on the policy rates by the Monetary Policy Committee (MPC) in August, albeit with abundant caution and a guidance of stronger vigil on inflation, was on expected lines. The MPC decision comes across as a pragmatic one that avoids knee-jerk reaction to the current bout of surging retail inflation.
However, the central bank was emphatic in conveying its preparedness to act if the situation demands in the coming months.
Indeed, while inflation has surged of late, it has largely been driven by food items. No other segment made a large contribution.
Typically, price spikes of the current nature often start softening in 2-4 months. RBI Governor Shaktikanta Das has rightly highlighted that supply-side interventions would remain critical to manage inflation going forward.
Accordingly, unless the ongoing weather disruption worsens further, despite the sharp rise at the moment, CPI may start softening by the next quarter. Furthermore, one notes, WPI (wholesale price) inflation averaged a drop of 2.8 per cent y-on-y during 2023-24 so far, reiterating that inflationary pressures are modest beyond the food items.
Thus, the RBI justifiably refrained from any rate action immediately, even though another hike in the coming months cannot be ruled out. In that context, the MPC meeting in early-October remains a live one. Apart from India’s inflation dynamics, the action and guidance of the US Federal Reserve in late-September will play a crucial role in influencing the global policy rate cycle, including that of India in October. The Fed continued to stay data dependent and has kept all their options open for the coming months.
Inflation forecast
The RBI has materially revised the CPI forecasts upwards beyond market expectations. Now the RBI expects inflation to average 5.4 per cent during 2023-24, revised higher by about 30 basis points (bps) higher than their previous forecast.
While the current surge in prices of food items, more specifically vegetables, played critical role in driving near-term forecasts higher, the near 70 bps upward revision in Q1 FY 24-25 CPI inflation (now projected at 5.2 per cent y-on-y) is a more significant one.
On the other hand, while the GDP growth forecast for 2023-24 as a whole was kept unchanged at 6.5 per cent, significantly, there had been upward revisions for H1 FY23-24. These upward revisions, though modest, underscore the RBI’s greater degree of comfort as regards the path of growth recovery despite several global headwinds.
The RBI’s move related to the incremental CRR surprised the market. This will likely absorb a meaningful quantum of more than ₹1 trillion of liquidity from the banking system for the next two fortnights. This move might prove to be an interesting step in slowing down money supply growth against the backdrop of a “transient” but sharp surge in headline inflation.
Finally, the RBI’s ability to demonstrate a “Fed-independent” monetary policy path was also supported by the cushion of a material improvement in trade and current account balance and a range-bound rupee. Rupee movement around that time could also have a material bearing on the RBI’s monetary policy choice in October.
In sum, monetary policy in India in the recent past has been characterised by decisive and front-loaded action balancing long-term objectives and near-term priorities.
Today’s policy decision was no exception. The MPC rightly refrained from any knee-jerk reaction at the moment. The RBI guidance was not unduly hawkish either.
However, today’s communication clearly underscored that the MPC’s October meeting remains a live one based on developments as regards a set of critical macro parameters.
The writer is Chief Economist & Head of Research in Bandhan Bank. Gaurav Mukherjee provided assistance for this article. Views expressed are personal