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Twenty-Fourth EGROW Shadow Monetary Policy Committee Meet held on September 24, 2022


Key Takeaways

  • The war in Ukraine continues to contribute to price volatility and higher inflation globally
  • Aggressive Monetary Policy tightening is underway, especially across the Advanced Economies
  • The inflation in the US was caused primarily by their expansionist monetary policy history, while in the UK, fiscal policy is responsible.
  • Agressive rate hikes, especially in the US, have rattled the exchange rates across the world
  • India’s growth trend to remain steady in the near future, with inflation staying within manageable limits
  • Increasing focus on reducing interest rate differentials between US and India will prompt RBI to follow Fed’s path in rate hikes
  • Weather uncertainties could impact growth
  • Recession could be expected by year-end

Recommendation of EGROW Shadow MPC

Members of EGROW – 5

Repo Rate

  • Increase by 50 bps 4
  • Pause the rate hike 1

Guests – 4

Repo Rate

  • Increase by 50 bps 1
  • Increase by 35-50 bps 2
  • Pause the rate hike 1

Detailed Views by Members of the EGROW Shadow MPC

1. Dr. Arvind Virmani, Chairman, EGROW Foundation

Post-pandemic (second wave), the growth rate was forecasted to be 7.5 % (+/- 0.5 %). After the Russian invasion of Ukraine, this was revised to 7.5 (+/- 1%) with a downward bias. Monetary tightening is too late in the world, as well as in India. There are important lessons to be learnt from this. The key for India is oil and the impact of the global recession on oil needs to be monitored. In the medium and long term, many investors are thinking about India as an important destination.

RBI should change over to a neutral stance, as the repeated supply shocks could have long term effects. There is a lot of self-serving, wrong analyses in the US market. However, it remains clear that the real interest differential with the US is important.

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

Global Scenario

The Fed Reserve has raised the interest rates aggressively since May 2022 as inflation peaked at around 9 percent. The Fed has raised the policy rate by 275 bps in the last 3 months as inflation soared from 1.67 percent in February 2021 to 9.1 percent in June 2022. Similarly, in view of the rising inflation, European Central Bank (ECB) and Bank of England (BOE) have also raised the policy rates by 125 bps, each, during the period. In recent periods, most of the countries have already raised the policy rates consequent to rising inflation. However, Japan continues to maintain an ultra loose monetary policy while Russia (to boost exports) and China have lowered the policy interest rates.

A deeper analysis of the countries that raised the interest rates reveals that high inflation is a consequence of the expansionary monetary policy that the US, ECB, BOE and others had been following since 2008. In fact, historically, since early 2000, the US economy had been experimenting with complex derivative products like asset and mortgage-backed securities and had severely suffered the consequences of financial engineering and soft-touch regulation in 2008. The balance sheet of the Fed Reserve quadrupled between 2008 and 2012 and then doubled from USD 4.31 million on March 11, 2020 to USD 8.8 million on September 6, 2022.

The aggressive rise of policy rates in the Advanced Economies (AEs), especially the US, has rattled the exchange rates across the world. The reserve currency of the global economy, the US dollar is strengthening while Euro, pound sterling, as also the Indian Rupee is depreciating along with many other currencies in the world. Interestingly, the price of gold (generally a safe haven) is declining in the last few weeks, as well as the price of crude.

Domestic Economy

In sharp contrast to most countries in the world, India's economy has been performing well in recent years. India is the fastest growing economy despite the Covid and all forecasts show that the growth trend will be steady for next two years. Industrial production, as measured by IIP for all segments – mining, manufacturing, electricity is recording healthy growth. The performance of cement, steel, and electricity, all related to infrastructure, are performing well. Inflation as measured by Wholesale Price Index (WPI) is declining both for food and fuel in recent months. The policy variable, Consumer Price Index (CPI), for food and all-commodities, is less than 7 percent which implies that domestic inflation is around the upper bound of the inflation target and not 4 to 5 times of the targets/trend, as in the USA, UK or Euro.

The exchange rate is volatile and going by the depleting foreign exchange reserves, the RBI seems to be attempting to control the volatility. However, the Rupee has pierced through the psychological barrier of Rs 80 to the USD, and why should it not? The inflation differential between the US and India for long has been in the range of 4 to 5 percent which implies a correction in the exchange rate. The exports are performing well despite the slowdown in the destination countries and CAD is expected to be contained at 3.5 percent in the financial year 2022-23. The financial sector, a reflection of the real sector, is performing well by all indicators and NPAs are expected to decline.

What should be the response of the RBI?

The market players in India are recommending a rise of 50 bps at the least to match the 75 bps hike by the US and Euro and by 50 bps by BOE, Australia, New Zealand, Brazil, Indonesia and many others. I differ with this assessment for the following reasons –

a) The argument that policy interest rate differential between the USA and India needs to be reduced so that capital flight does not take place is misplaced. The policy hike by the US since May 2022 is 300 bps while that by India is 140 bps and that by BOE and ECB is 125 bps. If the capital had to fly, it must have done so already.

b) The difference in the real policy rate is another consideration. The real policy rate in India is around (-) 1.50 percent currently while that in the US is (-) 5.3 percent. In normal times, real interest rates range between 0.5 to 2.0 percent. Thus, these are abnormal times and absurd real interest rate differentials, would not matter on a monthly basis for capital flight.

c) The inflationary pressures in India are not due to expansionary monetary policy (as in the US) or fiscal policy (as in the UK) but temporary because of the rise in commodity prices due to the Russia-Ukraine war. These would be corrected as the war ends. The correction in the prices of crude oil have already begun and that due to food would ease with the new harvest of wheat in next 6 months. In contrast, corrections in prices in the USA and UK are expected to correct in about 15 to 18 months because the reasons are embedded in expansionary monetary and fiscal policy. Hence, the response in India must be different from that in other AEs.


The Indian economy is performing well as measured by various parameters. It is hoped that the RBI will not succumb to the prodding of the markets or to the temptation of narrowing the interest rate differential. The rise in the policy interest rate will kill the nascent recovery in India, as housing and business investment will suffer. The rich AEs are engineering a recession because they can afford high unemployment rates through allowances. The rise in policy rate will negate the hard work put in the past by the RBI and the Government is calibrating a balanced/measured stimulus, which was not too restrictive nor aimed at flooding the markets. The robust results are out there seeking celebration. The blind imitation of the AEs in tightening the monetary policy is neither warranted nor desirable and India should stand its ground confidently. The foreign investment comes to India not because of interest rate differential but more so for the strong fundamentals and steady political leadership.

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

A 50 bps hike is expected in the upcoming MPC meeting, with the Peak rate around 6.25 %.

The Fed's aggressive actions are exporting higher rates across other economies. Pressure on Indian Rupee (INR) will be key in determining the domestic rate path

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

I recommend a hike in repo rate by 50 bps given current and expected inflation. FY-24 inflation rate is likely to be around 5.5 percent, following 6.7 percent in FY-23. Thus, the case for large front loaded rate hikes remains.

Change stance explicitly to “neutral” from removal of accommodation.

Telegraph further increases in repo rates. Recommend terminal repo rate of 6.5 per cent. Consider using secondary market bond purchases to add durable liquidity into the system given the possibility of further liquidity pressures on the back of FX intervention. This would be used as a fine-tuning instrument.

5. Shri Indranil Sen Gupta, Head of India Research, CLSA

Recommends a 50 bps hike.

Guest Panelists – Specialists from Market and Members from ASSOCHAM:

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

The RBI is likely to hike rates by 50bps.

After Jackson Hole in the US, the Fed’s narrative on rates have turned more hawkish. As a result, the RBI’s terminal rate for FY23 is also likely to move higher to 6-6.25%, from my earlier expectation of 5.75-6%.

India’s growth continues to hold up and is still nascent. The external sector appears to be the only point of weakness at this point in time. The markets know that the RBI’s key driver for raising rates is to try and maintain the interest rate differentials of India with respect to the US, to whatever extent they can.

Having said that, it seems unlikely that the RBI would push rates beyond 6.25%. Any currency pressures beyond this threshold could see the RBI step in and use FX swaps like it did in 2013 to help finance India’s elevated trade deficits and help ease any expected rupee volatility

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

Global economy has been seeing continuous monetary tightening, especially among the advanced economies. With the war still continuing, supply side mismanagements remain a key area of concern. Another area of concern is that of US Dollar soaring high levels. In the upcoming meeting of MPC, RBI should increase the repo rate by 35-50 bps.

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

During the course of the last 8 months, forecasts in global growth have gone down, while in inflation, it has gone up. For the past 3-6 months, there has been discussion on recession. We are currently at T-2 phase which means that a recession could be expected by the end of the year. Inflation expectations are deep-rooted and could continue in the long run. Indian consumer confidence needs to be monitored well. There have already been a lot of challenges in global trade, which needs to be addressed. One also has to be prepared for climate-related uncertainties. We expect a 35-50 bps hike in the policy rate from RBI in the upcoming MPC meeting.

4. Shri Jiji Mammen, Executive Director and CEO, Sa-Dhan

Microfinance institutions meet the credit needs of the low income households in the country. It benefits millions of households of low income groups in meeting their credit needs and thus aiding financial inclusion in the country.

The MFIs raise funds from Banks, NBFCs and Financial institutions for lending to the poor. Any increase in repo rate will increase their borrowing rates for MFIs and which will get transmitted to the ultimate borrowers. The microfinance borrowers who have been affected severely due to pandemic during the last two years will further get impacted due to the increasing inflation and enhanced cost of borrowings, thus causing strains on their net income.