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Twenty-Eighth EGROW Shadow Monetary Policy Committee Meet on June 02, 2023


Recording of the Event

Key Takeaways

  1. Amidst international turmoil, India’s growth remains resilient.
  2. Inflation is benign; Tax collection is robust; Rising interest rates could impact balance sheet of financial institutions.
  3. The El Nino effect is likely to impact inflation by 200 basis point.
  4. The Exports of Goods and Services are following a rising trend line.
  5. Demand is being led by investment and net exports but will likely broad-base to consumption as real income and financial conditions improve in the coming quarters.
  6. Recessionary fears in the AEs is a cause of concern for EMEs.
  7. Expansionary fiscal policy in the US could be inflationary and also cause spill-overs in EMEs.

Recommendations of EGROW Shadow MPC

Members of EGROW – 6

Repo Rate: No Change – 6

Guests – 3

Repo Rate: No Change – 3

Detailed Views by Members of the EGROW Shadow MPC

1) Dr. Surjit Bhalla, Former Executive Director, International Monetary Fund

The economy is growing rapidly and is already a large economy. It should decouple from the Policy making in the US.

The latest inflation figures are benign. It is therefore necessary to pause hikes on a long term basis.

If data and new information permits, rate cut should also be considered

2) Dr Charan Singh, CEO and Director, EGROW Foundation

The performance of the economy has been sterling in the last few months. The projections made by the RBI as well as others were anchoring the growth in Q4 in the range of 4.2 to 5.1 percent. The performance, in Q4, exceeded expectations and GDP recorded a growth rate of 6.1 percent. This growth is evident in sectors such as agriculture, manufacturing, construction, trade, and real estate, indicating a widespread and balanced expansion. Consequently, the Q4 performance was reflected in annual GDP growth rate which was estimated to be 7.2 percent as against the projection ranging between 6.8 to 7.0 percent. On an annual basis, agriculture and the real estate displayed exceptionally good performance. Government fixed capital formation, including capital expenditure, showed impressive results, indicating positive prospects and a multiplier effect which can spill over into next few years. On agriculture, recent data reveals record production in crops like rice, wheat, maize, oilseeds, sugarcane, mustard, rape seed, and soybean. On industry, the IIP exhibits improvement, particularly in mining, motor vehicles, transport equipment, beverages, and chemical products. Core industries, excluding crude, experienced significant growth, with coal, fertilizers, steel, and electricity recording growth of more than 8 percent. On the fiscal front, the economy performed well, exemplified by impressive GST collections in May, with a 12 percent increase compared to the previous year. Total revenue receipts amount to Rs. 1.7 lakh crore, while the government's revenue expenditure stands at Rs. 3.1 lakh crore. The proportion of revenue receipts to annual revenue is 6.3 percent, and for expenditure at 6.8 percent. Overall, the economy is beginning to demonstrate robust growth and green shoots.

The Purchasing Managers' Index (PMI) in manufacturing for May reached a high level of 58.7, exceeding April's 57.2 and indicating a robust economic cycle. Stock purchases are expanding at the fastest rate in twelve years. Exports are performing well. The PMI in services for April stands at 62.0, driven by the finance and insurance sectors. The private sector's PMI output increased to 61.6 in April from 58.4 in March, showing strong performance across different sectors. Exports in April reached $65 billion, up from $63.75 billion in April 2022, while imports remained low at $66.4 billion as compared with $72.1Billion in April 2022. This leads to a positive trend in the current account deficit. Unemployment figures show slight increase in April 2023 as compared with March 2023, although there are fluctuations in urban and rural areas according to the CMIE data. In May 2023, unemployment has declined. Global trends indicate moderation in overall prices. In India, inflation has also moderated across various indices, such as the CPI, WPI, CPI- IW, CPI for RW, and CPI for AL. The CPI for food is around 3.8, which is reasonably under control and close to the target range of 4+/-2. Inflation, according to food and general WPI remains low. Crude oil prices have declined rapidly to $68 per barrel, from $103 per barrel last year, while gold prices have increased recently due to global uncertainty. The US Federal Reserve, as well as the UK and Euro, are adopting a more moderate approach to interest rate hikes, and India should consider these trends for future prospects.

However, the geopolitical and economic situation is unfavorable, with the ongoing Russia-Ukraine war and support of the US Congress for widening deficits in the US. The IMF research, captured in recent Fiscal Monitor released in April 2023 shows a positive relationship between government fiscal deficits and inflation, indicating potential inflationary pressures in the US economy. In advanced countries, inflation correction may not occur immediately unless they accept higher inflation figures as targets. Still, interest rate adjustments in AEs may be less aggressive than initially expected for the remaining part of the year.

In view of the above, it is recommended to allow domestic economic growth to flourish, decouple from external factors, and encourage green shoots to strengthen. Therefore, a pause in increasing policy rate is strongly recommended.

3) Shri Indraneel Sen Gupta, Head of India Research, CLSA

We expect the RBI MPC to pause now and cut 100bp from October as growth (5.5percent) and inflation. (5.2percent) both come off. This assumes that the Fed pauses at 5.25percent.

Key risks:

  1. El Nino: can push up inflation by 200bp and delay rate cuts to December,
  2. Fed hikes: could resume if inflation doesn’t come off. If the Fed raises to 5.75percent, the RBI will likely need to hike to 6 75 percent and cut only from February.

4) Ms. Upasna Bhardwaj, Chief Economist, Kotak Mahindra Bank

As domestic inflation begins to inch lower and global monetary tightening cycle nears its lag leg we expect the RBI MPC to hold on to rates in the upcoming policy. Moreso, the resilient growth as indicated by the higher than expected 4QFY23 GDP also indicates that it should be a prolonged pause and not a pivot yet, atleast through this year. Further, with liquidity conditions having eased lately and the overnight rates again hovering towards the lower end of the policy corridor, i see RBI retaining its stance in this meeting. Overall, pause for now.

5) Shri Abheek Barua, Chief Economist and Executive Vice President, HDFC Bank

I recommend a neutral stance and expect the withdrawal of accommodation to continue in terms of managing liquidity. The RBI is actively preventing any excess liquidity in the banking system and has clearly revealed its liquidity management strategy.

Considering the global inflationary situation, it is appropriate to have a prolonged pause in interest rate hikes. The resolution of the U.S. debt ceiling talks has reduced the risk aversion in the market, so an immediate increase in interest rates is unnecessary.

China's disappointing performance in industrial commodities has moderated the inflation risks associated with commodities, including oil. However, other Asian countries are experiencing extreme heat and increasing imports of agricultural commodities, which remains a risk.

Given these factors, a pause in rate hikes is justified. If things continue as they are without major events or shocks, the focus of discussion will gradually shift towards when rate cuts are likely to happen. If there are no significant changes or risks, the desirability of rate cuts may be discussed in the next monetary policy meeting.

On the banking side, there has been a softness in credit demand for the past six months, particularly in small-sized portfolios for both retail and SMS customers. This indicates a tentative sign of stress and a disconnect between high-frequency indicators, headline macro numbers, and a noticeable decline in credit demand on a monthly basis.

6) Shri Siddhartha Sanyal, Chief Economist & Head- Research, Bandhan Bank

In the upcoming June 2023 monetary policy meeting, it is expected that interest rates will remain unchanged. Inflation numbers are mild, and if current trends continue, inflation is projected to average in the low 5 percent range over the next few quarters. This suggests that there is no immediate need for rate cuts or further tightening. The policy stance is likely to remain the same, with some debate about whether to continue withdrawing liquidity or shift to a neutral stance.

While the Reserve Bank of India (RBI) policy is of interest, the focus is more on the policy of the Federal Reserve (Fed). The Fed is also expected to be on pause, as indicated by the previous dot plot showing the possibility of only one more rate hike. There is no immediate reason to believe that circumstances have changed to warrant more rate hikes. However, uncertainty arises from the state of the U.S. recession, and if recession fears increase, the Fed may be forced to adopt a softer stance, although it may not be ideal given the high inflation rate.

The baseline scenario suggests that the Fed will remain on pause, and the dot plot will largely remain unchanged or indicate a less hawkish outlook. If this scenario holds, it is likely that other central banks, including India's RBI, will also maintain a longer pause, resulting in stable interest rates.

Guest Panelists – Specialists from Market and Members from ASSOCHAM:

1) Shri S. C. Aggarwal, Senior Member, ASSOCHAM & CMD, SMC Group

The upcoming monetary policy committee meeting the RBI faces a dilemma about whether to keep the policy repo rate unchanged at 6.5 percent. It is observed that Federal Reserve aggressive monetary policy became a challenge for the banking industry. Further there are fears of recession in the US and therefore there is a need for RBI to balance growth and inflation. It is noted that inflation in India has softened and is within the tolerance limit of 4- 6 percent. The GDP growth rate FY23 is 7.2 and can achieve a growth rate of more than 6 percent in the FY24. It is suggested that RBI should not increase the interest rate before September 30, 2023, based on the current economic conditions.

2) Shri Arjun G. Nagarajan, Chief Economist, Sundaram Mutual

The last time we spoke of a hawkish pause from the RBI, and that played out. We continue to expect hawkishness from the RBI. They would remain comfortable with around 5.5% inflation and 6-6.5% GDP for now. They would not want to pre-empt anything at the moment.India's stronger than expected GDP numbers have come from manufacturing, construction, and investment. There are favorable and unfavorable base effects due to a revision in the Mar'22 GDP numbers. Compared to what we thought earlier, growth in electricity and construction seems understated. The country’s 4Y % CAGR for the Mar'23 quarter has risen appreciably to 5.1% (from 3.9%)

Is the Fed's language shifting to 'skip' from 'pause'? The Fed commentary over the last few days has focused on a 'skip' rather than a pause. Markets realize there won't be as many Fed rate cuts as they had thought earlier. However, rate hike expectations are still live compared to the last time.

US non-farm payrolls (NFP) and consumer price index (CPI) numbers will be key to determine this narrative.

We continue to see the RBI's monetary policy being dependent on two broad variables: Fed rates and the Rupee. We do not expect a recession in the US in 2023. Our base case is that US growth will soften by the end of 2023, along with softer Fed narratives in the Mar'24 quarter.

We expect the RBI to align with the Fed on soft narratives and rates, only if the currency allows it to. In short, there is a need to move back to more sustainable trade deficit numbers. We still do not know how structural the services growth pickup is, therefore the focus on India's trade deficit from the point of view of currency risk."

3) Shri Prithviraj Srinivas, Chief Economist, Axis Capital Ltd

We expect the MPC to remain on pause for an extended period. Demand is being led by investment and net exports but will likely broad-base to consumption as real income and financial conditions improve in the coming quarters. Headline inflation should average under 5% in FY24 but core inflation could remain stubborn near 5% given sturdy services sector demand and improving wage growth. On El Nino, even if India doesn't see severe impact due to opposing influence from Indian Ocean Dipole, the global impact of El Nino will likely impact wheat and edible oil complex which are already under tight supply conditions due to conflict in the black sea region. G3 policy settings will also remain restrictive for an extended period of time given tight labour markets and entrenched inflation conditions. In sum, given where India is in the demand cycle and the potential for strong capital demand going forward in an environment where global capital is more expensive, the central bank in India will have to maintain neutral to moderately restrictive monetary policy environment to safeguard macro-stability. The RBI will likely remain on hold, unless there is clear evidence emerging of severe adverse impact from a recession in G2 economies. Remaining on pause with no change in stance and forward guidance suggesting data dependent approach seems to be the most appropriate monetary policy position at this point.