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Twenty-Fifth EGROW Shadow Monetary Policy Committee Meet held on December 02, 2022


Recording of the Event

Key Takeaways

  1. Domestic growth remains resilient. Indian economy recorded a growth rate of 6.3 percent in the second quarter of FY23.
  2. The CPI and WPI moderated to 6.7 percent and 8.3 percent, respectively in October 2022. This trend is likely to continue further, although sticky core inflation presents a major challenge.
  3. Tax collection statistics points towards a robust fiscal sector, and a broad-based recovery
  4. The Exports of Goods and Services are following a rising trend line but growth in imports is on a higher side implying increasing pressure on current account deficit
  5. The widening difference between the growth rates of credit and deposit, over the past few months, is a cause of concern
  6. Real interest rate differentials between the Fed and the RBI needs to be taken into account
  7. Real interest rate in India is an important policy variable for investment decision making
  8. Recessionary fears in the advanced economies is a cause of concern for EMEs.
  9. Aggressive rate hikes from advanced economies can be detrimental for growth revival of global economy, and will hit EMEs hard

Recommendations of EGROW Shadow MPC

Members of EGROW – 4

Repo Rate

  • Increase by 35 bps – 3
  • No Change – 1

Guests – 3

Repo Rate

  • Increase by 35 bps – 2
  • Increase by 25 bps – 1

Detailed Views by Members of the EGROW Shadow MPC

1. Dr Charan Singh, CEO and Director, EGROW Foundation

The GDP data for quarter 2 shows that the economy is growing at the rate of 6.3 percent as compared with 13.5 percent in Q1. These growth rates are robust in the current global context. In the previous year, the quarterly growth rates were 8.4 percent in Q2 and 20.1 percent in Q1. GDP is growing at 9.7 percent in the first half (H1) of 2022-23 as compared with 13.7 percent in H1 of the previous year. Agriculture, with growth rate of 4.6 percent in Q2 and 4.5 percent in Q1 as compared with 3.2 percent and 2.2 percent in the corresponding quarters of the previous year, continues to play a pivotal role in the growth story of India. Other sectors like construction; real estate; public administration; and trade, hotels, transport have also been performing well.

The share of private final consumption expenditure in GDP has increased from the previous year to 59.2 percent in H1 from 55.4 percent in H1 of the previous year. Similarly, Government fixed capital formation has increased from 33.1 percent to 34.7 percent over the period. The exports of goods and services are rising from 22.4 percent to 23.1 percent of GDP but growth in imports is significantly higher with increase from 26.4 percent to 31.5 percent of GDP, implying increasing pressure on current account deficit.

The high frequency data is quite encouraging in terms of sales of commercial vehicles, purchase of private vehicles, consumption of steel, and cargo handled at sea ports, signifying that the economy is performing well. There is a significant level of growth in bank deposits and credit-offtake in the banking sector, with growth in credit out-stripping deposits significantly. Industrial performance in the first half of the year, in terms of IIP and that of the core sector, especially coal, fertilizers, cement and electricity, also shows a positive trend. Thus the economy is performing well and green shoots are visible across the spectrum.

On the price level, there is some concern because the consumer prices in October 2022 at 7.01 percent and 6.77 percent, on food and of All-commodities, respectively, continues to be higher than the target band. The WPI continues to ease, and the declining trend in oil prices would ensure further decline in both consumer and wholesale price index.

The fiscal story also seems very encouraging as the GST collection is record high at Rs. 1.45 lakh crore in November 2022. It is increasingly expanding to capture the whole economy; and therefore, there is potential for GST for increasing further. Additionally, direct tax collection upto November 10, 2022 is significantly higher than the previous year. The growth rate in corporate tax collection and personal income tax (after refunds) is 24.5 percent and 28.1 percent respectively. This collection is 61.3 percent of the total budget estimate of direct taxes for 2022-23. Direct tax collection, net of refunds, is 25.7 percent higher in the current year as compared with the previous year. Thus, the fiscal sector has demonstrated that the domestic economy is resilient to the global economy.

On employment, PLFS and CMIE shows that unemployment has decreased significantly. EPFO data reveals that formal sector employment has improved with 16.82 lakh members added in September 2022. In the period July to September, 2022, according to PLFS, unemployment rate in urban areas has declined to 7.2 percent from 9.8 percent during similar period in the previous year.

Internationally, India is outperforming other countries. The slow-down in growth rate is across the world but the decline is more severe in AEs as compared to EMEs. The lower growth projections for 2023 by the IMF, as compared with the earlier projections for the AEs is because of the sharp rise in policy interest rates leading to recessionary trends. The aggressiveness by the AEs in increasing their policy interest rates could be detrimental for the growth of global economy, and revival of growth in the post-covid period for the EMEs. As far as inflation is concerned, AEs are experiencing inflation in the range of 5 times their long term trend. In contrast, inflation is just about the upper side of the target band in India.

Indeed, with this scenario, India is emerging as an island of growth and stability in the global economy. Hence, RBI should not be aggressive in increasing the Repo rate. It is time that a pause button by the RBI would be ideal to nurture the growth impulses.

2. Shri Indraneel Sen Gupta, Head of India Research, CLSA

Inflation has peaked & the RBI has hit zero real rate on FY20-FY23 inflation basis, there is no doubt that the RBI will need to try to limit the differential with the Fed to 150+bp.

We see the Fed raising to 5.25 percent by May 2023. This will likely force the RBI to raise to 6.75 percent and cut 100bp in 2HFY24.

We also see a 1percent CRR cut to raise deposits to meet high loan demand as Open Market Operation is difficult after the rally in G secs.

My recommendation is with Fed likely to raise its 50 basis points in mid December 2022 the RBI should increase its rate by 35 basis points.

3. Ms. Upasna Bhardwaj, Chief Economist, Kotak Mahindra Bank

While inflation seems to have peaked out, it still remains elevated. More so the core inflation remains sticky and poses the risk of higher for longer inflation especially when food inflation has become more volatile than ever.

Economic activity while still growing will a differential pace, seems resilient. While the need for further tightening remains, softening inflation trajectory suggests a shift towards smaller pace of rate hike by the MPC.

I recommend 35 basis point of rate hike in December and don’t expect any change to the stance. I assign a higher probability of a change in stance in the February policy to neutral along with a final rate hike of 25 bps once the real rates convincingly turn positive above 1 percent.

4. Shri Abheek Barua, Chief Economist and Executive Vice President, HDFC Bank

While inflation is likely to moderate going forward, sticky core inflation presents a major challenge. Headwinds such as slowing exports, uneven growth notwithstanding, current domestic growth is resilient and helps to sustain core inflation.

I recommend 2 to 3 more rate increases going forward, with a call of a 35 bps hike in December. The terminal repo rate should be 6.5-6.75 per cent and unless core inflation moderates significantly without merely reflecting base effects the scope for rate cuts seems limited for CY23.

Moderate liquidity support is necessary possibly through secondary market operations

A clearer articulation of stance through an explicit shift to neutral is desirable

Guest Panelists – Specialists from Market and Members from ASSOCHAM:

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

I am of the opinion that should be increased by 35 basis points. My opinion is based on certain factors like CPI inflation which is around more than 7 percent in and it seems that it is softening. and by the end of the financial year CPI inflation would come down to less than 6 percent. Moreover, the wholesale price in the index inflation has come down to 8 percent which is around 16 percent in May 2022 and June 2022.

If we talk about growth perspective. The growth indicators, which is economy indicators, which is seen auto sales and PMI are increasing. Consumer durables and exports is weakening in view of global recession or lessening of the global demand.

But still we feel that considering good economic indicators, like auto sales, GST collection, eBay bill and PMI continue to indicate healthy recovery. So considering all these we presume that RBI should increase, the repo rate by 35 basis points. Also, I can presume that they, switch to neutral policy stance.

2. Shri Siddhartha Sanyal, Chief Economist & Head- Research, Bandhan Bank

The global economic and geopolitical backdrop had been tricky during most of 2022, which prompted the RBI to stay cautious as they surprised with larger-than-expected front-loaded rate hikes during the summer. The central bank remained proactive and cautious to guard the economy against inflationary spirals and global spill-overs even if that meant a somewhat slower recovery immediately as they remained committed to financial stability and long-term sustainability of growth. While the cumulative repo rate hike of 190 basis points (bps) just between May and September was unusually fast, the MPC may not have finished rate hikes in the current cycle. However, one expects them to opt for a smaller quantum of hike: a 25 bps hike in the repo rate – taking it to 6.15 percent – in the current meeting is our baseline scenario.

The discussion on the terminal repo rate and the possibility of a pause in rate hikes soon may get greater prominence in and around the December MPC meeting. While the terminal repo rate will depend materially on global macro conditions and central bank actions (eg., by the US Fed) in the coming months, one does not expect it to cross the 6.5 percent mark in the current hiking cycle. That might mean a real repo rate of over 1 percent and a nominal spread of about 1.5 percent between Indian and US policy rates by Q1 of 2023-24. One feels that the MPC will certainly remain mindful that a large part of assets books of the banking system now reflects external benchmark linked rates (EBLR) – which is nearly 50 percent now as against sub-5 percent in the previous hiking cycles – the pass through is nearly instantaneous and complete. Also, while it is important for an emerging economy central bank to stay broadly in sync with the global interest rate cycle, one needs to recognize that the deviation in case of inflation and GDP growth from their respective trend-lines in the western hemisphere is much more pronounced than in India at the moment.

Apart from the much discussed rate action, any communication from the central bank on the liquidity front might be of interest. The widening of the differential between growth rates of credit and deposit has been stark over the past six months. Credit demand improved along with the much-anticipated recovery in the economy, while deposit growth remains markedly sombre partly reflecting the sharp reduction in excess systemic liquidity by the RBI during the current financial year. A change in the cash reserve ratio (CRR) is not expected in the December MPC meeting. However, the RBI may consider either a CRR cut (even if for a finite period) or open market operations (OMO) in the coming months based on prevailing money market and financial market conditions. Finally, of late, the INR trajectory also offered comfort along with better FII flows, partly reflecting some of the recent policy initiatives (Eg., measured trade restrictions, INR settlement in external trade, greater flexibility for banks as regards non-resident deposits) apart from measured forex market intervention.

3. Shri Arjun G. Nagarajan, Chief Economist, Sundaram Mutual

I expect 35 basis points of rate hikes from the RBI in its December 2022 policy. After this rate hike, the RBI should ideally be done and should follow up with an extended pause well into 2023. Worst case scenario, two hikes, ending at 6.50 percent. On inflation, no concerns likely, with the trajectory moving in line with expectations. On growth, 6.5-6.8 percent for FY23, followed by 6-6.5 percent for FY24 appears likely. With the call rate having moved appreciably below the Repo rate, a CRR cut like some market participants expect seems unlikely from the RBI.

The RBI has so far delivered only around 50 percent of the Fed's rate hikes, and most of it has been largely to keep the rupee depreciation in check, rather than for any inflation-related concerns. Note here India does not have an inflation problem like the western world experiences. On rate transmission, the weighted average lending rate appears to have moved up only by 100bps; despite 190bps of cumulative rate hikes from the RBI.

The gap between the Fed rate and the RBI's Repo has narrowed sharply. The markets expect the Fed to start easing on the rate front from Sep'23. Through this and beyond, the RBI is most likely to continue holding on to its rates and allow the policy rate spread to increase. This would be an added comfort for the rupee into H2 2023.