Economy
What to expect from the MPC meet
Summary
The monetary policy committee (MPC), which is responsible for fixing the benchmark interest rate in India, is currently meeting. What are the odds the committee would further hike key policy rates? Mint explains the options and their implicationsThe monetary policy committee (MPC), which is responsible for fixing the benchmark interest rate in India, is currently meeting. What are the odds the committee would further hike key policy rates? Mint explains the options and their implications.
What happened at the last MPC meeting?
The MPC, in its February meeting, hiked the repo rate by 25 basis points to 6.5% and continued with its policy stance of ‘withdrawal of accommodation’. This was the sixth successive hike by a total of 250 basis points since May 2022. Repo rate is the rate at which the central bank lends money to commercial banks against government securities. The decision came in the backdrop of persistently high inflation; expectations of slowing global growth; weak external demand in major economies; and debt distress. Persisting global uncertainty has complicated the fight against inflation.
What is the US Fed’s view on rate hikes?
March 2023 witnessed the collapse of the sixteenth largest bank in the US, the Silicon Valley Bank. This was followed by Signature Bank. New York-based First Republic Bank also plunged into a crisis with its shares crashing. Share prices in European banks, too, were hit hard by the banking turmoil. The US Federal Reserve last month increased its key benchmark interest rates in spite of this turmoil. However, it did give indications of the rate hike spree nearing its end. The US treasury secretary recently said there is a need to “consider whether deregulation may have gone too far".
How is India’s inflation trending?
Retail inflation eased to 6.44% in February after a three-month high of 6.52% in January. Food inflation remained close to 6% due to cereal and milk prices. The worrying factor? Core inflation (inflation excluding food and fuel) remained sticky at 6.1%, the upper limit of the central bank’s tolerance band. However, WPI-based inflation eased in February.
What factors should the MPC heed?
It needs to keep an eye on price stability. However, considering that monetary policy acts with a lag, it might be time for the central bank to focus on the impact of rising interest rates on economic growth. While global financial contagion concerns have come to the forefront, India’s financial sector has not given out any distress signals yet. Besides, one cannot ignore gloomy prospects— deceleration in world trade, specifically in India’s major export destinations,unseasonal rains and OPEC production cut.
What could be the course of action?
In February, MPC members voted 4:2 for continuing with the hike. Two members advocated relaxing liquidity considerations to support economic growth. Since monetary policy works with a lag, the billion-dollar question now is: what’s the right time to call a halt? With core inflation being sticky, the MPC could probably tilt toward another 25-basis point increase but change its stance to neutral. It is likely the committee could hint at a pause in rate hikes thereafter.
Jagadish Shettigar and Pooja Misra are faculty members at BIMTECH.
