Is it time for RBI to change its policy stance?

Photo: Mint
Photo: Mint


At its last meeting of 2022 held in December, the MPC increased the repo rate by 35 basis points to 6.25%. This was the fifth rate hike by the central bank in FY23

The Reserve Bank of India’s Monetary Policy Committee (MPC) will announce its decision on policy rates today. With the decline in inflation and an expected fall in exports, it may be time for the central bank to shift its policy approach towards growth. Mint explains.

What did the last MPC meeting suggest?

At its last meeting of 2022 held in December, the MPC increased the repo rate by 35 basis points to 6.25%. This was the fifth rate hike by the central bank in FY23. While the stance continued to be withdrawal of accommodation, there were discussions around the need for a change in monetary policy stance. The worrisome point was core inflation, which remained sticky at the upper limit of the tolerance band. However, with inflation levels declining, some members were also of the view that it is time for a change in stance to neutral. Considering that monetary policy acts with a lag, it might be time for a pause.

What are the current inflationary trends?

India’s retail inflation peaked at 7.8% in April 2022, and returned to RBI’s target range in November 2022. Retail inflation in December 2022 eased to 5.72%, staying within the RBI’s target band of 4%(+/-2%) for a second month in a row. A fall in vegetable prices helped keep the inflation within the range. The wholesale price index fell to 4.95% in December 2022 as against 5.85% in November 2022. The decline was primarily due to the fall in prices of food items, mineral oil, crude petroleum & natural gas and textiles. Inflationary expectations by businesses and households have moderated in FY23.

Graphic: Mint
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Graphic: Mint

What about the global scenario?

The US Federal Reserve last week raised its benchmark rate by 25bps, giving no indication of it nearing the end of its rate hike cycle. US inflation, despite showing signs of slowing down, is still near its highest level since the 1980s. The Bank of England too raised rates by 50bps last week. However, it also indicated that, there would be smaller rate hikes in future.

What are the signals from India?

As per the Economic Survey, despite global headwinds, the country is expected to grow at 6.5% in FY24. Rising credit disbursal, capital investment cycle beginning to take off, and the strengthened balance sheets of corporates and banking sector will help. Private final consumption expenditure in H1FY23 was at its highest since FY15, boosting production and capacity utilization. However, advanced economies are staring at a recession, and may lead to slower exports from India going ahead.

What measures can the RBI adopt?

Recently, the RBI governor said that inflation would continue to be the focus of monetary policy. The Economic Survey also indicated headline inflation at 6.8% for FY23. That would require continuation of a tight monetary policy posture. However, it is crucial to view the likely impact of declining exports on growth. Recessionary trends would be riskier than inflationary pressures. It is time for the MPC to re-orient the policy approach in favour of growth.

Jagadish Shettigar and Pooja Misra are faculty members at BIMTECH.

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