In its upcoming policy review meeting this Friday, the central bank’s Monetary Policy Committee (MPC), according to analysts, is likely to maintain the status quo on interest rates. Although it could alter its stance in view of the inflation crossing the tolerance limit.
The Reserve Bank of India (RBI), during the April 6-8 review, will assess the impact of rising inflation on consumer spending, and take measures to boost economic growth.
In the domestic market, commodity prices have soared due to disruptions in the global supply chain. The ongoing Russia-Ukraine conflict has further exacerbated the economic situation that has already been on a deteriorating path since the pandemic.
India’s retail inflation accelerated to 6.01 percent in January this year, crossing the upper limit of RBI’s tolerance band. It was primarily driven by the rising prices of food and manufactured items. The Consumer Price Index (CPI) was the highest in the past seven months, rising to 5.66 percent in December 2021 from 4.06 percent in January 2021.
Aditi Nayar, the principal economist at ICRA Limited (formerly Investment Information and Credit Rating Agency of India Limited), said that in the upcoming April 2022 policy review, the Monetary Policy Committee is likely to revise its CPI-based inflation forecast, while the growth projections for 2022-23 would be reduced.
Japanese financial services group Nomura believes that even though inflation is still near 6 percent, the RBI has set the bar high regarding an increase in interest rates.
The tax cuts on petrol and diesel in November 2021, by the central government, came as a sigh of relief for consumers. But prices of household items like tea, cooking oil, rice, and pulses, have increased by 20-40 percent after the pandemic, further burdening the consumer.
Due to the rise in freight costs and margin pressures, beauty products, biscuits, and home appliances have witnessed a price hike as well. Analysts believe that price pressures are building up. Moreover, fuel prices were hiked today for the 14th time in 16 days. Hostilities between Russia and Ukraine have also created insurmountable pressure on Oil Marketing Companies( OMCs), leading to increased retail fuel prices as international crude oil prices skyrocket.
“RBI will be walking a tightrope on its monetary policy decisions, striving to control inflation within the tolerance band while at the same time supporting nascent growth impulses,” said Suman Chowdhury, Chief Analytical Officer, Acuité Ratings & Research. He believes that under current uncertainties, the RBI has “limited scope” to tighten monetary policy.
The RBI, in its previous policy review, stated, ”The persistent increase in international commodity prices, the surge in the volatility of global financial markets, and global supply bottlenecks can exacerbate risks to the outlook.” This time, the situation has worsened especially due to the global ramifications of the Russia-Ukraine conflict.
Nomura said in its report that the RBI could reevaluate its projection for both GDP growth and CPI inflation in the upcoming policy meeting. “We believe the RBI is overly optimistic on inflation, and that a course correction in monetary policy is warranted. We expect a policy pivot in June and hence are building in 100bp in cumulative repo rate hikes in 2022,” said the report.
Reportedly, foreign portfolio investors have pulled out a net investment of Rs 88,135 crores from the Indian market. One of the reasons behind the investment outflow, according to experts, is the strain on global monetary policy. The market liquidity crisis of the Indian market will also be one of the major concerns of the upcoming policy review.