On April 6, the monetary policy committee (MPC) of the Reserve Bank of India will begin its meeting to deliberate.
On the course of interest rates and other aspects of monetary policy in the Indian economy for the following two months. The result of these deliberations will be announced on April 8.
The global economic landscape has undergone a major disruption since the previous meeting, which ended on February, because of the Russian invasion of Ukraine. It has pushed up prices of important commodities, including crude oil, and made them volatile.
The inflationary shock and uncertainty because of the Ukraine war is likely to generate headwinds for global growth as well. As a major energy importer, the Indian economy will not be isolated from these effects. All this will make the Reserve Bank’s challenge of balancing inflation with growth even more difficult. Here are three charts which explain this in detail.
Economic recovery is still below MPC’s expectations
While predicting 7.8% GDP growth for 2022-23 in February, the MPC observed it was lower than desired levels. “MPC judges that the ongoing domestic recovery is still incomplete and needs continued policy support.
It is in this context that the MPC has decided to keep the policy repo rate unchanged at 4% and to continue with an accommodative stance as long as necessary to revive and sustain growth on a durable basis and continue to mitigate the impact of Covid-19 on the economy, while ensuring that inflation remains within the target going forward.” The repo, or repurchase rate is the rate at which RBI lends to banks.
The emphasis on policy support to “revive and sustain growth on a durable basis” has become a regular feature of MPC resolutions after the pandemic. MPC or RBI officials have never quantified this target.
Economists believe the forthcoming MPC will make a downward revision to its growth forecast. A research note dated April 6 by Samiran Chakraborty, chief economist, India at Citi Research, says the meeting is likely to revise its growth forecast from 7.8% to 7-7.5%.
Latest Purchasing Managers’ Index (PMI) data supports the argument about a deceleration in the growth momentum. Manufacturing PMI came at 54 in March 2022.
While this is higher than the critical threshold of 50 (it signifies expansion over last month’s economic activity), the latest value is lower than the February value of 54.9.
“Business conditions in India improved in March, but the latest results showed slower expansions in factory orders and production as well as a renewed decline in new export orders,” S&P Global, the agency which conducts the PMI survey in India, said in a statement. “Inflation concerns meanwhile dampened business confidence, which fell to its lowest level in two years,” it added.