RBI Monetary Policy Highlights: Hit Economic Growth Rate Projection For 2022-23

The Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) hiked the repo rate 50 basis points (bps) to percent cent with immediate effect on Friday. The central bank has raised rates four times so far this fiscal year. The RBI had previously increased the repo rate by 40 basis points in an off-cycle meeting in May and by 50 basis points in June and August.

In order to control the galloping inflation and the plummeting rupee, which touched an all-time low earlier this week because of the strengthening of the dollar, market analysts anticipated that the MPC would increase the repo rate by 50 basis points (bps) at this meeting. Retail inflation, indicated by the Consumer Price Index (CPI), which the RBI takes into account when determining its benchmark lending rate, was 7 per cent in August. Since January of this year, retail inflation has been above the central bank's 6 per cent comfort level.

Reserve Bank of India (RBI) Governor Shaktikanta Dasstated in his speech on 30th September today that the world is experiencing a third major shock because of aggressive monetary tightening by central banks. He explained that the financial market is nervous, and the global economy is in the eye of a new storm. He indicated that the Indian economy continues to remain resilient in spite of global turmoil.

Das commented on inflation, saying that the inflation trajectory is still clouded by uncertainties caused by ongoing geopolitical tensions and nervous global financial market sentiments. "Inflation is currently hovering around 7 per cent, and we expect it to remain elevated at around 6 per cent in the second half of 2022-23," he said.

While real GDP growth in Q1 was lower than expected, Das stated that the late recovery in Kharif sowing, comfortable reservoir levels, improved capacity utilization, buoyant bank credit expansion, and the government's continued emphasis on capital expenditure is expected to support aggregate demand and output in the second half of 2022-23.

The RBI governor also said that the bank rate, marginal standing facility, and standing deposit facility rates have been modified to 6.15 percent and 5.65 percent, respectively. According to him, the MPC opted to continue concentrating on the withdrawal of accommodation in order to ensure that inflation stays within target moving ahead by a vote of 5 out of 6 members.

The central bank reduced its forecast for growth from 2022 to 2023 from 7.2 per cent to 7 per cent. According to Das, the real GDP growth for 2022–2023 is predicted to be 7.0 per cent, with Q2 growth of 6.3 per cent, Q3 growth of 4.6 percent, and Q4 growth of 4.6 per cent, with risks being evenly distributed. While a 7.2 per cent, the increase is anticipated for the first quarter of 2023–24.

The global economic climate has been characterised by sluggish growth with increasing prospects of recession, elevated inflationary pressures, and tightening financial conditions brought on by aggressive and synchronized monetary policy actions and positions. These changes have resulted for emerging market economies (EMEs) in the loss of foreign exchange reserves as well as currency depreciations brought on by a rising US dollar and capital outflows. Even as the pandemic and the ongoing crisis in Ukraine continue to impact economic activity, the global economy faces difficult challenges from the green transition, real and financial fragmentation, trade restrictions, and reshoring. Financial markets are still volatile, global spillovers pose significant headwinds.

The MPC convened four times between April and September 2022, including an off-cycle meeting in May 2022. When the MPC met in April 2022, the world's economic and financial conditions had become difficult because of the steep increase in commodity prices internationally and worldwide uncertainty over the rate of monetary policy normalization.

The MPC ascertained that the escalating geopolitical tensions due to Russia – the Ukraine war, the generalized hardening of global commodity prices, the possibility of protracted supply chain disruptions, disruptions in trade and capital flows, divergent monetary policy responses, and market volatility presented sizeable upside risks to the inflation trajectory and downside risks to domestic economic growth in its April report.

Low Global Growth and High Global Inflation: Macroeconomic Implications

Global growth is predicted to drop from 6.1% in 2021 to 3.2 per cent in 2022, and the picture is 'dark and more unpredictable' with downside risks predominating (IMF, 2022). The IMF predicts that global consumer price inflation would rise from 4.7 per cent in 2021 to 8.3% in 2022.

These worldwide stagflationary impulses have a variety of consequences on domestic inflation and growth. First, decreased export demand and overall internal demand and growth are hampered by decreased external demand. At the same time, low global demand for commodities resulted in the decline of commodities prices.

Second, increasing global commodity prices spur direct and cost-push channels that push up local inflation, but weaker aggregate demand also slows down domestic growth.

Third, higher global inflation and interest rates have an impact on capital flows, putting downward pressure on the domestic currency and leading to higher imported inflation.

According to the 'Rest of the World (RoW) Block' of the RBI's Quarterly Projection Model 3, the peak impact on India's inflation and growth through all channels occurs in four quarters. Second-round effects can keep inflation at high levels for more than eight quarters, necessitating appropriate monetary policy actions to anchor inflation expectations (Chart I.1.1). In such cases, frontloaded monetary policy actions that demonstrate a strong commitment to the inflation target contribute to credibility gains and aid in containing inflation with lower output losses (John, Kumar and Patra, 2022).

Manufacturing firms polled in the Reserve Bank's industrial outlook survey for July-September 2022 anticipated lower raw material and selling prices in Q3:2022-23. Companies in the services and infrastructure sectors also anticipated a decrease in input costs and selling prices in Q3:2022-23.

In the manufacturing and services purchase managers index (PMI), respondents reported an increase in input and output prices in August 2022, albeit with some moderation in the pace of inflationary pressures. Professional forecasters polled by the Reserve Bank in September 2022 predicted that CPI inflation would fall from 7.3 per cent in Q1:2022-23, to 6.0 per cent in Q4, and 4.9-5.0 per cent in H1:2023-24.

Professional forecasters' long-run inflation expectations remained broadly aligned around the inflation rate.

Several exogenous factors, both global and domestic, will have an impact on the inflation outlook in the coming months. 

Global commodity prices have fallen from highs due to weaker global prospects, but they remain elevated and volatile. Global supply chains are gradually normalizing, but they continue to be vulnerable due to geopolitical disruptions and financial market volatility. Thus, it is highly expected that RBI’s repo rate hike will protect businesses and the economy from volatility.

Dr. Hiranmoy Roy

Guest Author The author is Associate Professor, Department of Economics and International Business, School of Business, University of Petroleum and Energy Studies (UPES), Dehradun

Suketu Mehta

Guest Author The author teaches MBA Strategy and Consulting at School of Business, UPES