Generally, I don’t write on Monetary policy as they are not something that I was chasing. But As I am completing 8 years, this is a new addition.
As expected, the Monetary Policy Committee met on 6,7,8 February 2023 and decided to increase rates by 25 basis points in the first monetary policy in 2023. Dr. Shashanka Bhide, Dr. Rajiv Ranjan, Dr. Michael Debabrata Patra and Shri Shaktikanta Das voted to increase the policy repo rate by 25 basis points. Dr. Ashima Goyal and Prof. Jayanth R. Varma voted against the repo rate hike. Dr. Shashanka Bhide, Dr. Rajiv Ranjan, Dr. Michael Debabrata Patra and Shri Shaktikanta Das voted to remain focused on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth. Dr. Ashima Goyal and Prof. Jayanth R. Varma voted against this part of the resolution.
MPC assessment said global growth is expected to decelerate during 2023. Inflation is exhibiting some softening from elevated levels, prompting central banks to moderate the size and pace of rate actions. Weak external demand in major advanced economies (AEs), the rising incidence of protectionist policies, volatile capital flows and debt distress could, however, weigh adversely on prospects for emerging market economies (EMEs).
The first advance estimates (FAE) released by the National Statistical Office (NSO) on January 6, 2023, placed India’s real gross domestic product (GDP) growth at 7.0 per cent year-on-year (y-o-y) for 2022-23, driven by private consumption and investment. On the supply side, gross value added (GVA) was estimated at 6.7 per cent.
High frequency indicators suggest that economic activity has remained strong in Q3 and Q4:2022-23. Rabi acreage exceeded last year’s area by 3.3 per cent as on February 3, 2023. Industrial production expanded by 7.1 per cent in November, after contracting by 4.2 per cent in October. Capacity utilisation in manufacturing is now above its long period average. Port freight traffic, e-way bills and toll collections were buoyant in December. Purchasing managers’ indices (PMIs) for manufacturing as well as services remained in expansion in January, despite some moderation compared to the previous month.
CPI headline inflation moderated to 5.7 per cent (y-o-y) in December 2022 – after easing to 5.9 per cent in November – on the back of double digit deflation in vegetable prices. On the other hand, inflationary pressures accentuated across cereals, protein-based food items and spices. Fuel inflation edged up primarily from an uptick in kerosene prices. Core CPI (i.e., CPI excluding food and fuel) inflation rose to 6.1 per cent in December due to sustained price pressures in health, education and personal care and effects.
The overall liquidity remains in surplus, with average daily absorption under the LAF increasing to ₹1.6 lakh crore during December-January from an average of ₹1.4 lakh crore in October-November. On a y-o-y basis, money supply (M3) expanded by 9.8 per cent as on January 27, 2023, while non-food bank credit rose by 16.7 per cent. India’s foreign exchange reserves were placed at US$ 576.8 billion as on January 27, 2023.
The outlook for inflation is mixed. While prospects for the rabi crop have improved, especially for wheat and oilseeds, risks from adverse weather events remain. The global commodity price outlook, including crude oil, is subject to uncertainties on demand prospects as well as from risks of supply disruptions due to geopolitical tensions. Commodity prices are expected to face upward pressures with the easing of COVID-related mobility restrictions in some parts of the world. The ongoing pass-through of input costs to output prices, especially in services, could continue to exert pressures on core inflation. The Reserve Bank’s enterprise surveys point to some softening of input cost and output price pressures in manufacturing. Taking into account these factors and assuming an average crude oil price (Indian basket) of US$ 95 per barrel, inflation is projected at 6.5 per cent in 2022-23, with Q4 at 5.7 per cent. On the assumption of a normal monsoon, CPI inflation is projected at 5.3 per cent for 2023-24, with Q1 at 5.0 per cent, Q2 at 5.4 per cent, Q3 at 5.4 per cent and Q4 at 5.6 per cent, and risks evenly balanced
Governor also highlights that this is the 75th year of RBI under government ownership. So he highlighted the transformation of RBI and monetary policy. He highlighted the importance of events in the last 3 years including the pandemic, and war. 4 out of 6 members voted in favor of increasing rates by 25 basis points to 6.5%. Consequently, SDF standing deposit policy will be revised to 6.25% and MSF marginal standing facility and Bank rate to 6.75%. 4 out of 6 members of The monetary policy committee also voted in favor of the withdrawal of accommodation to ensure inflation remains under target going forward while supporting growth.
Governor Shaktikant das highlighted the global economic outlook is not as bad as it was a few months back. Growth prospects improved. Inflation is reducing. remain high in a major economy. IMF changes growth forecast. several central banks went for smaller rate hikes, and some went for pause. The federal reserve was increasing rates by 75 basis points for quite some time. now even they are slowing down in interest rate hikes. Except for the British economy and Russia, other looking better. Even inflation in the British economy is reduced slightly. So IMF action is looking right as increasing expected growth rates. The dollar was at a higher level than also coming down. The debt ceiling is a new challenge for them. A tighter financial condition caused my aggressive monetary policy action, and volatile financial markets, debt distress.
RBI mentions Real GDP growth mention at 7%. Here is a catch. In the budget, the Real GDP is a little bit different. Some analysts said that RBI being aggressive on inflation makes room for 2022-23 for the government. Higher rabi crop is also positive. Rural demand is improving many financial results show that the rural part of the country is not having much economic activity. RBI governor hopes that robust capital expenditure in infrastructure should support the growth. Consumer price inflation moving below the upper price band of RBI inflation is a good thing. Governor mentions that core inflation remains sticky which is a global problem as mentioned by Federal Reserve chairman Jerome Powell. Though inflation will come down, it is expected to be higher than the 4% target. Outlook is cloudy due to many things including high commodity prices and crude prices. This is a question as to why Governor takes higher crude prices as an assumption when Brent and WTI prices are nowhere near $90 while writing this.
Inflation in the 4th quarter will be 5.6% while the Policy rate stands at 6.5% Pretty high difference. When did we see this last time? Governor highlights that Policy rates still trail pre-pandemic levels. Liquidity remains in surplus. which was one highlight.