The RBI’s Monetary Policy Committee has begun its three-day meeting on Wednesday. The six-member panel is holding deliberations to decide on the interest rates in the country, keeping in mind the inflation and other global factors. The meeting comes at a time when global central banks are tightening the monetary policy and raising interest rates.
Suvodeep Rakshit, senior economist at Kotak Institutional Equities, said, “The RBI’s deliberations will likely be centered around global monetary policy cycle and outlook for global growth; external sector imbalances manifesting in pressures on the rupee; recent easing of global commodity prices; domestic inflation and growth trajectory… Arguably, the quantum of hike is finely balanced within the 35-50 bps range.”
The MPC will announce its decision on the last day of its meeting (Friday, August 5). Here’re the challenges the MPC faces currently:
Countries across the globe, including India, have been facing high inflation for a few months on supply chain disruptions due to the Russia-Ukraine war. In India, the inflation in June stood at 7.01 per cent, which was slightly lower than the 7.04 per cent recorded in May but was above the RBI’s tolerance limit of 2-6 per cent.
According to a Crisil report, the overall CPI inflation is expected to be at 6.8 per cent and food inflation at 7 per cent for the current fiscal. “High cost of inputs in agriculture production (fertilisers, pesticides, animal feed and diesel) is expected to maintain pressure on food inflation through this fiscal. Despite recent softening in international prices of several food items, they remain higher than last year so far and the rupee has weakened offsetting some of the impact of falling international prices for imported food items.”
Food inflation started picking up from sub-1 per cent in September 2021, all the way up to 7.7 per cent in June 2022. CPI inflation also rose from 4.3 per cent to 7 per cent. This fiscal so far (April-June 2022), food inflation has averaged 8 per cent, compared with 3.8 per cent in fiscal 2022 and 3.6 per cent in the five years preceding the pandemic (i.e., fiscals 2016-2020). Thus, food has become the top contributor to CPI inflation this fiscal, unlike the previous year and between fiscals 2016 and 2020, when core inflation was predominant.
Global Rate Hikes
In the US, as inflation is prevailing at a four-decade-high level of 9.1 per cent, the Federal Reserve recently announced the most aggressive interest rate increase in nearly 30 years and hiked the benchmark borrowing rate by 75 basis points. The US central bank said it reaffirms that it remains “strongly committed to returning inflation to its 2 per cent objective” and expects to continue to raise the key rate.
In Europe also, the European Central Bank also recently raised interest rates by more than expected amid concerns over inflation. The ECB raised its benchmark deposit rate by 50 basis points to zero per cent. It was the ECB’s first rate increase in 11 years.
The rate hikes by the global central banks make returns there more attractive for investors, thus raising concerns over a capital flight from India. For instance, the rate hike by the US makes interest rates there attractive. Also, global uncertainty is leading to investors moving to the US for safe-haven investments.
Vijay Singhania, chairman of TradeSmart, said, “With central banks across the globe increasing interest rates, the RBI will be doing the same is a given. With oil prices under control and the monsoon progressing well in most parts of the country apart from northern India, chances are that RBI would like to increase rates moderately at around 30 basis points.”
Stating the pressure on commodities prices is easing with a lot of metals and other commodities falling 15-30 per cent, Arun Malhotra, founding partner & portfolio manager at CapGrow Capital advisors, said, “This should ease the inflationary pressure going forward. The twin objective of the RBI of maintaining price stability and at the same time not hurting growth would be best achieved by raising rates by 25 bps.”