Bulletin: RBI to remain agile and alert to ensure durable disinflation process
3 min read 17 Feb 2023, 09:16 PM ISTRBI sees the current year to be characterised by a milder global slowdown than earlier anticipated, however, the central bank emphasizes that the 'trajectory remains unpredictable.'
PremiumThe Reserve Bank of India (RBI) on Friday said that monetary policy has to be tailored to ensure a durable disinflation process. In February 2023 bulletin, the central bank signalled to continue to be agile and alert in regard to moving parts in the inflation trajectory. RBI is looking for a decisive moderation in India's key consumer price index.
Although, RBI sees the current year to be characterised by a milder global slowdown than earlier anticipated, however, the central bank emphasizes that the "trajectory remains unpredictable."
In the bulletin, RBI governor Shaktikanta Das said, "in a very short period, monetary policies across the world have veered from one extreme to the other in response to a series of overlapping shocks."
He highlighted that in the current unsettled global environment, emerging market economies (EMEs) are facing sharp trade-offs between supporting economic activity and controlling inflation, while preserving policy credibility.
Joining the global central banks, RBI continued to hike the repo rate in February 2023 policy while maintaining its "withdrawal of accommodation" stance. This month, RBI hiked the repo rate by 25 bps, bringing it to 6.5%. This would be the sixth consecutive rate hike this fiscal.
Giving rationale to MPC's rate hike and policy stance, Das in the latest bulletin said, "growth prospects in major economies have improved, while inflation is on a descent, though it still remains well above the target in major economies. The situation remains fluid and uncertain."
He added, "as price pressures wane, several central banks have opted for slower rate hikes or pauses. The US dollar has retreated sharply from its highest level in two decades. Tighter financial conditions caused by aggressive monetary policy actions, volatile financial markets, debt distress, protracted geopolitical hostilities, and fragmentation continue to impart high uncertainty to the outlook for the global economy."
Going ahead, RBI expects inflation to moderate in 2023-24. However, Das added that "it is likely to rule above the 4% target."
As per Das, the outlook is clouded by continuing uncertainties from geopolitical tensions, global financial market volatility, rising non-oil commodity prices, and volatile crude oil prices.
He said, the MPC will continue to maintain a strong vigil on the evolving inflation outlook so as to ensure that it remains within the tolerance band and progressively aligns with the target.
"We need to see a decisive moderation in inflation. We have to remain unwavering in our commitment to bring down inflation," he said.
Hence, Das believes monetary policy has to be tailored to ensuring a durable disinflation process.
Further, he explained that a rate hike of 25 basis points is considered appropriate at the current juncture. The reduction in the size of the rate hike provides the opportunity to evaluate the effects of the actions taken so far on the inflation outlook and on the economy at large. It also provides elbow room to weigh all incoming data and forecasts to determine appropriate actions and policy stance, going forward.
Das also added, "monetary policy will continue to be agile and alert to the moving parts in the inflation trajectory to effectively address the challenges to the economy."
In January 2023, India's consumer price index inflation accelerated higher than the street's expectations at 6.52% due to a spike in food prices. This would be the highest reading in three months. Inflation was below RBI's upper tolerance limit of 6% between November to December last year before shooting up in January indicating more rate hikes from the central bank.
Post the latest inflation data, Dr Vikas Gupta, CEO and Chief Investment Strategist, OmniScience Capital said, "if the CPI remains consistently above 6% in coming months then it would be a cause for concern. Depending on the persistence, RBI might maintain higher rates for longer. However, at this point, we think RBI is likely to raise rates by 25 bps as per earlier expectations. However, if CPI persists above 6%, the RBI would be forced to go for a 50 bps rate hike; but looks unlikely currently. Impact on the equity markets is likely to be low, given the growth expectations in revenue and earnings."
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