The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) unveiled its latest review of the monetary policy.
What is the need for monetary policy reviews?
- In India, the RBI is entrusted with the responsibility of devising monetary policy “with the primary objective of maintaining price stability while keeping in mind the objective of growth”
- The central bank is supposed to target a 4% retail inflation level, although the RBI has the leeway of inflation going up to 6% or falling to 2% in any particular month.
- When inflation runs high, RBI raises the repo rate — the interest rate it charges banks when it lends them money. Doing this incentivises savings and disincentives expenditure, thus curtailing overall demand and GDP. That, in turn, reduces the inflation rate.
- In times of weak economic activity, RBI cuts the repo rate and by the reverse logic, boosts demand and economic output.
What are the Highlights of the Review?
- The MPC slashed its Gross Domestic Product (GDP) growth estimate to 6.8% for the fiscal year 2022-23, from 7% earlier.
- This comes a day after the World Bank raised its growth forecast to 6.9% for financial year 2022-23 from a revised 6.5% accounted in October 2022.
- Real GDP growth is projected at 7.1% for Q1:2023-24 and at 5.9% for Q2.
- As the data shows, in September 2022, it cut the GDP forecast for the full year but raised the quarterly GDP forecast.
- The MPC has maintained the forecast for headline inflation (the total inflation in an economy) in the financial year 2022-23 at 6.7%.
- RBI expects headline inflation to stay above the 6% mark for 15 straight months. Even after that, hitting the 4% level will likely take time.
- The MPC increased the repo rate by 35 basis points (bps) to 6.25%, and the Standing Deposit Facility (SDF) stands raised to 6%.
What is the significance of the latest policy review?
- Indian policymakers are facing an odd quandary. Over the past couple of years, India has had to deal with a scenario where inflation has been high even as economic output struggles to grow.
- This has happened for a variety of reasons. In particular, India was already experiencing a severe growth slowdown before the Covid pandemic.
- This was made worse by the lockdowns during Covid, while inflation shot up on account of supply disruptions, first due to the pandemic and then due to Russia’s war in Ukraine.
Why is RBI’s stance being called hawkish?
- The term “hawks” refers to central banks that have a very low threshold for tolerating variation from the targeted inflation level. What makes the RBI’s current stance more “hawkish” is the RBI’s reference to “core inflation
- RBI traditionally targets the headline rate, which is moderating. Core inflation, on the other hand, is going up and thus, it may push the RBI to take a more hawkish stance from here on.
- The trouble is: if core inflation is high, it takes a while to come down, because it implies that inflation has become broad-based (i.e., higher prices have seeped through all parts of the economy).