Home / Economy / Eco activity still to reach pre-Covid levels; RBI may slow pace of rate cuts till 2023: ADB

The Asian Development Bank (ADB) in its latest report said the Reserve Bank of India (RBI) may slow down the pace of rate hikes until 2023 to tame inflation while supporting growth.

The report states the RBI is likely to increase policy rates even though economic activity is still below the pre-pandemic trend and inflation continues to be driven more by domestic supply conditions than global factors.

"The RBI may, however, consider slowing the pace of policy rate hikes until next year because economic activity, although increasing, remains below the pre-pandemic trend. At the same time, allowing the exchange rate to serve as an automatic stabilizer will help improve the balance of payments position," according to the Asian Development Outlook (ADO) Update.

The ADB has recently cut its financial year 2022-23 (FY23) gross domestic product growth forecast for India to 7% from 7.2%, citing sluggish global demand and tightening of monetary policy to manage inflationary pressures from elevated prices for oil and other commodities.

For next fiscal, ADB expects the Indian economy to grow by 7.2% as against 8% it had projected earlier.

"Nevertheless, the economy is expected to grow strongly over the forecast horizon, with investment playing a catalytic role. Private consumption will be affected by higher inflation eroding consumer purchasing power even though consumer confidence continues to improve.

"Sticky core inflation will adversely impact spending over the next 2 years if wages fail to adjust," cautions the ADB report.

Inflation forecast

The Manila-based multilateral funding agency has raised the inflation forecast for the current fiscal year ending in March 2023 to 6.7% from its earlier projection of 5.8%.

For the next fiscal year too, the forecast has been revised upwards to 5.8% from 5% earlier.

Inflation will remain elevated this year and the next, ADB said in an update to its flagship ADO 2022 report.

"This Update forecasts the inflation rate averaging 6.7 per cent in FY2022 (fiscal ending in March 2023) before moderating to 5.8 per cent in FY2023 (ending in March 2024), just below the central bank target range of 2 - 6 per cent," it added.

Both forecasts are higher than ADO 2022's projections.

Even though supply pressures are expected to ease in the current fiscal year, upward pressure on inflation could continue because of demand-side pressures caused by increasing economic activity, as per the ADB report.

RBI increased policy rate by 140 bps over 4 months

To curtail inflationary expectations, the RBI has increased the policy rate by 140 basis points or 1.4% over 4 months.

High inflation due to elevated oil and commodity prices will likely require continued tightening monetary policy to ensure that inflation expectations do not get entrenched, which would likely hinder economic growth in the short run, it said.

As per the report, India's exports and growth are expected to be adversely affected due to weaker than expected global demand over the next two years.

Even as government subsidy support on fertiliser and gas, free food distribution as well as excise duty cuts will help offset some of the effects of high inflation on consumers, ADB said taxes on packaged food products will likely be a burden on consumers already dealing with rising inflation.

The Manila-based agency also expects investment growth to be lower than projected due to the increase in RBI policy rates, increasing the cost of borrowing for investors amid rising global uncertainty.

On rupee

On the rupee, ADB said the RBI has been active in preventing it from depreciating further, resulting in the biggest drawdown of foreign exchange reserves since the 2008-09 global financial crisis.

The rupee depreciated from 74.3 to the US dollar in January 2022 to 80 in July. It fell further below 81 this week.

Union Finance Minister Nirmala Sitharaman has said the Indian Rupee has held "very well" against the US Dollar compared to other global currencies and has not been affected by "fluctuations or volatility" as much.

She, however, also assured that the government and the RBI were keeping a close watch on the situation.

"If any one currency which has held its own and did not get into fluctuation or volatility as much as other currencies, it is the Indian Rupee. We have held back very well," said Sitharaman at a press conference here.

She further emphasised that her ministry and the RBI were keeping a close watch on the matter.

With agency inputs

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