The big change between the Reserve Bank of India’s (RBI) monetary policy statement on Thursday and its annual credit policy statement on 3 May is the central bank’s current emphasis on the risks to growth coming from abroad. Both the statements say that the policy action is expected to “contain inflation and anchor inflationary expectations by reining in demand-side pressures”, but the second objective on 3 May was to “sustain the growth in the medium term by containing inflation”, while on Thursday it was to “mitigate the risk to growth from potentially adverse global developments”.
In contrast to the worsening it sees in the global environment, the central bank does not see any change in its domestic growth outlook. Indeed, it takes comfort from the fact that the trend in industrial outlook painted by the new series for the Index of Industrial Production is more upbeat than that of the old series. It further says that “even as there is deceleration in some important sectors, notably interest-sensitive ones such as automobiles, there is no evidence of any sharp or broad-based slowdown”. It says that corporate results for the March quarter, as well as credit growth, have been reasonably strong, while demand conditions, too, remain robust.
According to the credit data, it says, “The higher cost of credit is restraining credit growth, but it still remains fairly high, suggesting that economic activity is holding course.”
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It points to the Purchasing Managers’ Index numbers, which show moderation, but also disclose that growth is still pretty strong. Or, at least, it’s still too strong for RBI’s liking.
So why didn’t RBI go in for another 50 basis points hike then? For two reasons—one, the effect of its earlier rate hike is “still unfolding” and two, it “needs to balance the adverse movements in inflation with recent global developments and their likely impact on the domestic growth trajectory”. This seems to indicate that it’s because of soft global factors that RBI didn’t tighten more.
What message does the RBI policy give the markets? It says unambiguously that inflation is too high for comfort and its actions haven’t so far had a strong impact on domestic growth. That suggests more hikes in future. It’s saying that the slowdown in domestic growth is not enough for it to take its foot off the brake. At the same time, it also draws attention to the heightened risks abroad and says the Indian economy could be affected by the slowdown there.
For the stock market, it’s Hobson’s choice—if global conditions stabilize and domestic growth remains strong, RBI will hike more. If growth slows, that would mean lower earnings.
Graphic by Yogesh Kumar/Mint