Skip to main content

RBI Monetary Policy Review: Balancing Growth and Inflation Amidst Uncertainties

Dear Readers,

Welcome to our weekly newsletter, where we provide you with the latest insights and updates on economic developments. Let's dive into the highlights of the Reserve Bank of India's (RBI) monetary policy committee's June meeting and its implications for the economy.

The minutes of the meeting revealed that the committee members acknowledged the positive progress in both growth and inflation. However, they emphasized that the RBI should not become complacent despite the cumulative 250 basis points policy rate hikes and should remain vigilant in ensuring price stability. While the past rate hikes are gradually impacting the economy, the central bank still needs to exercise caution and avoid any drastic shifts in policy.

Economists have labeled the June policy as a "Goldilocks" one, indicating a favorable balance between inflation and growth. The outlook for growth is more optimistic than before, and inflation appears less daunting. However, the MPC members, particularly those from the RBI, expressed concerns. Deputy Governor Michael Patra cautioned about potential inflationary risks arising from factors like El Nino and supply-demand imbalances. Governor Shaktikanta Das also emphasized the need to continue the fight against inflation until the 4 percent target is achieved.

The overall sentiment suggests that the RBI is unlikely to consider rate cuts in the near future. With the primary focus on attaining the 4 percent inflation target, a change in policy stance seems unlikely. Market participants have adjusted their expectations accordingly, leading to a scaling back of bond yields and swaps in anticipation of rate cuts.

Among the members of the MPC, Jayanth Varma stands out as a contrarian. He has consistently dissented from the policy stance, considering it to be of limited significance. Varma agrees with the majority in maintaining a pause and shares concerns about inflation. However, he believes that the repo rate is already high enough to bring inflation within the mandated 2-6 percent band. Varma also raises the alarm that monetary policy could potentially harm the economy and questions the stance of withdrawal of accommodation.

Time will determine whether Varma's concerns about the policy's impact on demand are valid. The weak private consumption growth in the fourth quarter of FY23 may be indicative of the consequences of aggressive policy rate hikes. Balancing growth and inflation often requires making sacrifices, as exemplified by the US economy, where efforts to reduce inflation may lead to a recession.

The path to achieving a 4 percent inflation rate in the Indian economy remains uncertain, and the extent of the required sacrifice for this goal is yet to be determined.

Here are the highlights from the newsletter:

  • The Reserve Bank of India's monetary policy committee noted improvement in both growth and inflation during their June meeting. 
  • Members emphasized the need to maintain price stability despite previous rate hikes.
  • Economists referred to the June policy as a "Goldilocks" one, with positive changes in both inflation and growth.
  • Deputy Governor Michael Patra warned of potential inflation risks from factors like El Nino and supply-demand imbalances. 
  • Governor Shaktikanta Das stressed the ongoing fight against inflation until the 4 percent target is reached. 
  • Jayanth Varma, a dissenting MPC member, believes the policy stance is of limited significance and inflation risks are being downplayed. 
  • The RBI is unlikely to pivot towards rate cuts in the near future, focusing on achieving the 4 percent inflation target. 
  • Market expectations of rate cuts have scaled back, reflected in bond yields and swaps. 
  • Varma argues that the repo rate is already high enough to bring inflation within the mandated range, cautioning against potential damage to the economy. 
  • Weak private consumption growth in the fourth quarter of FY23 may be a result of the aggressive policy rate hikes.
  • The balance between achieving 4 percent inflation and maintaining economic growth remains uncertain.

Comments

Post a Comment

Popular posts from this blog

RBI at rescue again

In short,  RBI’s first was March 27 th - cut interest rates by 75 bps and other relief was Moratorium. RBI’s second booster dose- cuts Reverse Repo rate by 25 bps to 3.75%. What is Reverse Repo rate? – Rate at which the RBI borrows money from banks. Expensive for banks not to lend. Positive move for corporates and borrowers To conduct TLTRO 2.0 for an aggregate amount of Rs. 50, 000 Crore to begin with. Liquidity booster for NBFCs and HFCs – At least 50% of amount must go to mid and small sized NBFCs and MFIs. Standard loans as of March 1, need not be classified as NPA till May 31. Banks required to maintain additional provisioning of 10% on standstill accounts. No monetization of deficit. No direct lending to NBFCs. No Repo against corporate bonds.   Now the jargon behind this move, the reverse repo rate is the rate at which banks when they have nothing to do with the money, give it to RBI and RBI gives them just 3.75%. Now unt...
Post a Comment
Read more

Banking Sector Earnings Outlook

Welcome to our weekly newsletter, where we bring you the latest insights and trends from the world of finance. This week, our focus is on the upcoming quarterly earnings season, with particular emphasis on the banking sector. It appears that listed firms are poised to deliver another impressive set of numbers, although the pace of growth may vary across sectors. Amidst the noise and excitement, we have identified two key data points that can provide valuable insights for investors. Data Point 1:   Loan Interest Rates The share of loans with interest rates of 9 percent and above has risen to 56.1 percent as of January-March FY23, up from 39 percent in the previous quarter (FY22 Q4). This data point highlights the scope for bank earnings this season. Banks generate revenue by charging interest on loans they provide and paying interest on deposits they receive. The difference between the two is their earnings. While the potential for further lending rate increases is limited, as muc...
Post a Comment
Read more

Immaculate Disinflation and Its Challenges in India and Globally

  Dear Readers, The term "immaculate disinflation" has gained significant attention lately, especially as global inflation rates start to come down. Economist Paul Krugman coined the term, which refers to disinflation without an increase in unemployment. However, disinflation has not been entirely painless for everyone, as some beleaguered regional banks in the US face a slow run on their deposits. In India, retail inflation for April was 4.7%, the lowest since October 2021, due mainly to the base effect. However, month-on-month retail inflation increased from 0.23% in March to 0.51% in April, indicating that price pressures continue, despite the year-on-year optics. Similarly, the CMIE Core index, which excludes food, fuel, light, and fuel for vehicles, fell from 6.2% in March to 5.9% in April, but went up month-on-month from 0.27% to 0.58%, indicating that companies still have pricing power. The Index of Industrial Production (IIP) numbers indicate that disinflation h...
Post a Comment
Read more