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Twenty-Ninth EGROW Shadow Monetary Policy Committee Meet on August 4, 2023


Link of the Recording

Key Takeaways

  1. Domestic economy sustaining growth momentum with expected growth rate in range of 5.5% to 6.3%.
  2. The capex indicators remain strong.
  3. GST collection for July 2023 remains robust.
  4. Inflation likely to be shaped by food price dynamics. Headline CPI inflation likely to be over 6% for July, primarily due to uneven rainfall and spike in food prices. But this spike is temporary and inflation is likely to come down by September.
  5. Despite global slowdown, trade deficit has narrowed.
  6. Oil prices and gold prices have tightened due to global uncertainty.

Recommendations of EGROW Shadow MPC

Members of EGROW 6
Repo Rate

No Change – 6

Guests 4
Repo Rate

No Change – 4

Detailed Views by Members of the EGROW Shadow MPC

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

There is no evidence that inflation is rising, rather it is falling. But two questions arise. First, how long should the pause in rate continue, and second, when the rate cut should happen. The latest rate hike by US Fed could be its last rate hike. The rate cut in India could depend on the behavior of US Fed. There is no need to cut the Repo Rate immediately, but there is a need to start thinking of rate cut by early October.

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

The monetary policy of August 10, 2023, should retain the current Repo Rate. This will help stabilize the financial markets in India as well as remove uncertainty from the portfolio of investors.

Indian economy is passing through a very critical but happy stage. To analyze it, different segments of the economy can be analyzed. First and foremost, the fiscal situation in the country seems to be improving. GST collection has increased to ₹1.65 lakh crore in July, which is higher by 11 percent than July 2022. The ITRs also show a positive trend; 6.8 crore ITRs have been filed until July 31, which is 16.1 percent higher than 5.8 crore last year. The first-time filers are 53.7 lakh, which is a positive trend. In a way, the initiatives taken by the government in recent months in terms of GST and compliance under tax administration are beginning to show results.

The banking industry is showing good results despite adverse global situation. In 2022-23, deposits increased by 9.3 percent compared to 8.2 percent in the previous year, and advances increased by 15.8 percent as compared with 9.8 percent in the previous year. Thus, the banking industry continues on a growth trajectory which is very positive for the economy.

In the analysis, sectorally industrial production is up by 5.2 percent in May 2023. The sectors like manufacturing and mining are recording positive trend. In general, based on the use-based classification, consumer non-durables have done impressively as well as infrastructure is doing well. In analyzing the core industries, the performance has also been encouraging. Coal, fertilizers, cement, steel are performing robustly amongst the core industries. Coal production in July 2023 is higher by 14 percent as compared to July 2022. In the Quarter-1, April-June 2023 coal production at 223.4 million tonnes is higher by 8.6 percent as compared to the previous quarter. Thus, infrastructure is performing reasonably well.

In analyzing other important indicators, like inflation, the wholesale price index is in the negative zone for the month of May and June. In June, WPI for all commodities recorded a negative growth of 4.1 percent while WPI for food has recorded a negative growth of 1.2 percent. In case of CPI, inflation is within the range bound. Food inflation and CPI in general is around 4.4 percent and 4.8 percent, respectively. Thus, prices are showing a steady trend. However, it is apparent that in the month of July, because of tomatoes, prices could be showing an upward trend. There is also a fear that there could be, because of the ongoing war between Russia and Ukraine, prices of oil seeds and rice as well as pulses like tur, may rise. And therefore, price trends could increase in the next release on inflation data.

On the external sector, the trade deficit is moderating. In the Quarter-1, April-June 23, trade deficit is down to $22.6 billion as compared with $31.5 billion in the quarter of the previous year, April-June 2022. Exports of electronic goods have shown an excellent growth of 47.1 percent, as also iron ore, around 35 percent. However, given the global situation, exports cannot be relied upon as a permanent contributor to growth. With the slowdown in the advanced countries, India's exports could also take a severe dent.

Global situation is little alarming but stabilizing. Inflation in other countries has moderated from their peaks of 9 percent to 10 percent to now 7 percent in UK and around 3 percent in the USA. However, in these countries, growth continues to be a concern. As far as crude oil is concerned, the prices are tightening and is in the range of $80 a barrel in August 2023. Similarly, the price of gold is also tightening in recent months as it increased to $1947 per ounce in August 2023. Given the above global situation, policy rates have increased by 25 basis points in the US, UK, Europe, as well as Canada. The emerging markets have not increased their policy rates in recent months.

In view of the above analysis of the Indian economy, amidst global performance, India is contributing significantly as an engine of growth and is the fastest growing economy in the world with growth projected at 6.1 percent by the IMF. The industry in the country is also performing reasonably well but there is scope for higher investment and higher growth, especially in consumer durables, intermediate and capital goods. In this situation, it may be best to keep the interest rates as they are and not disturb the economy, specially the private sector as there is scope for growth in the manufacturing and mining sectors. The fact that the USA has raised their policy rates by 25 basis points and the fear that there could be a flow of capital from India to the USA need not necessarily be correct at this stage of global growth. The stock market in India is booming, and confidence in the country is high as reflected in various indicators. Therefore, the Indian economy should be allowed to stabilize in its financial sector policies and the banks with their interest rates, so that the economy continues to enjoy stable economic growth. The further increase in already high interest rates could adversely impact private investment. Even a short hike in the interest rates can delay or postpone investment projects. Therefore, the objective should be to lower the interest rates in the near future and by maintaining a pause button now, the journey to lower the interest rates will become easier and earlier.

Therefore, my recommendation would be, to pause hike in interest rate cycle despite the increase in advanced countries. It would be rather appropriate to start considering lowering the interest rates from the next cycle (October 2023) itself. So, the investment cycle post-covid, starts to increase and the country benefits from increased investment in private sector and start recording higher employment. This would also be necessary, considering that lower investment implies lower employment as private sector waits for the correction in interest rates and does not take risk in investing at higher rates.

To conclude, my suggestion is to immediately prepare a strategy to lower the interest rates and implement the same before the end of the current calendar year. Further, forward guidance in the direction of interest rates can spur growth immediately.

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

We expect the RBI to pause on August 10 and cut 100bp from December if the Fed pauses at 5.5%. If the Fed finally hikes to 5.75%, the RBI will hike 25bp on October and cut 125bp from February. We expect the RBI to look through the spike in agflation due to uneven rains.

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

Cumulative impact of more aggressive Fed rate hikes and persistent upside risk to domestic inflation could prompt a 25bps rate hike but I firmly believe that a prolonged pause is a better policy choice than swings.

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

The RBI should remain on hold, keeping its stance unchanged at “withdrawal of accommodation”. Uneven rainfall and the spike in vegetable prices is likely to drive CPI inflation up well over 6 per cent for July and keep it in that zone. This is primarily due to vegetable prices and could be transitory but there are risks for cereals, oils and pulses prices due to adverse domestic and global conditions. This could shift the trajectory of inflation up and delay the process of returning to 4 percent inflation over the medium term.

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

After a spell of brisk rate hikes during large part of FY23, the MPC maintained status quo on rates in April and June. The pause by the RBI was vindicated by softening of CPI inflation to sub-5% levels during the summer months.

However, of late inflation has again inched higher and the key global central banks, such as the US Fed, have again embarked on hiking interest rates reflecting inflation concerns after maintaining status quo on rates for a few months. Against this backdrop, curiosity around next week’s meeting of the MPC has certainly increased.

Indeed, we are eyeing at an inflation number of around 6.6% for the upcoming July print, which is a big surge from the average of about 4.5% in the previous quarter.

However, despite the current inch up in inflationary pressure, India’s CPI looks set to hover in the low-5% handle during the current quarter and bulk of the inch up in inflation came from food prices rather than in a broad-based fashion.

The key question is whether this food price inflation will be confined mostly to vegetables and perishables or whether there'll be more sustained pressures from items like cereals and oil-related products.

The current spike in inflation – though sharp at the moment – can very well be for a couple of months, or perhaps limited to this quarter, given that a large proportion of this spike is coming from food prices and perishables. Typically, such spikes tend to cool off in a few months.

Given the significant ground covered by the central bank over the last year, I believe they can afford to stay in a wait-and-watch mode. Rushing to change the stance of policy could also be potentially disruptive to expectations.

In sum, while the MPC will surely reiterate their strong vigil on inflation and the fact that another hike in the coming months cannot be ruled out, my baseline expectation remains that of a pause in August. The RBI repeatedly emphasized that the status quo on policy interest rates should be seen as a “pause, and not a pivot”; a pause in August will not come in the way of a hike in future, if felt necessary by the central bank.

Also, the external sector balance improved materially in recent months and the INR stayed resilient. Overall, thus, one expects the RBI to stay cautious and be emphatic in reiterating their strong vigil on inflation, but not another rate hike immediately.

By the time of the next MPC meeting in early-October, we shall have the inflation prints of July and August in hand. The action and guidance of the US Federal Reserve in September will play a crucial role as well. Also, the currency movement around that time could also influence our decision-making process.

I believe there's enough reason to stay on hold and exercise patience at the moment, and a decision to change the policy rate further, if needed, can be taken another two months down the line.

Guest Panelists – Specialists from Market and Members from ASSOCHAM

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

Indian economy is performing well and is in strong position globally. Rate cut pause should continue and Repo Rate should not be hiked by the RBI on August 10, 2023.

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

It is expected that the RBI’s narrative will remain hawkish in its upcoming policy. However, the key drivers for any moves in the RBI policy rate will remain the Fed and India’s elevated trade deficit. The Fed has most likely peaked on its rate hiking cycle and therefore do not expect any more RBI rate hikes as well. Nevertheless, an RBI hike is expected only if the Fed delivers yet another 25bps rate hike. On the current inflation numbers where one sees tomatoes at 200%+ y-o-y and pulses at 40% y-o-y, expect the RBI to see through it with some commentary on the government and its supply-side measures. Expect both the Fed and the RBI to be on an extended pause with the Fed’s first rate cut to be in Mar’24. The RBI will tag the Fed on rate cuts, but with some delay. Expect RBI rate cuts to start in the Jun’24 quarter.

3) Shri Madhav Nair, Country Head, Mashreq Bank

The economic growth seems to be holding up with growth in industrial production. Capex indicators continue to be robust and there is also some signs of private sector capex (both brown field and green field) in infrastructure/construction and capital goods. Business sentiments have softened but continue to remain strong.The industry would like to have reduction in rates to boost growth but it may be counter productive in the short run due to lingering concerns on CPI inflation and uneven rainfall and in any case the transmission of benefits from the rate cut may not be felt immediately.

My view is that for the time being MPC should hold on to the rates and hopefully the food related inflationary pressures will ease soon.

4) Shri Rajan Pental, Executive Director, YES Bank

Food prices in India, especially vegetables (mostly tomato) now pose a risk for Headline CPI inflation to be above the 6% threshold in Q2 and Q3 of FY24. Before the vegetables shock hit us, street expectations for inflation (including that of RBI’s) were at sub-6% levels for the year. At YES Bank, we now see the average Headline CPI inflation at 5.6% for FY24, and the next reading at 6.5-6.6%, given the extent to which the vegetable prices are factored into the CPI numbers. Note that as per the National Horticulture Board (NHB), vegetables prices have increased close to 45% in July 2023.

Apart from vegetables, there are other elements within the food segment that show some concern. FAO reported that its Rice Price Index hit a multi-year high in June. In India monthly momentum in cereal prices have also been increasing over the last 3 months, given weak rice sowing. Even as the rice sowing has picked up in India, weaker rice production globally (El Nino impact) has led the GoI to stop exports of non-Basmati rice, thereby ensuring domestic food security and preventing any sharp jump in rice prices. Department of Consumer Affairs (DoCA) shows a rice price rise of 2.7% MoM in July. Pulses could be another worry due to weak sowing patterns till date. Further, global edible oil prices have been on a rise while milk, eggs, fish, meat prices in India have seen higher MoM momentum.

Implication of the above for monetary policy action:

Rate cut discussions should be put to rest through RBI’s communication process. At the August meeting, we expect a status quo on the rates as also the stance, with the RBI sounding relatively hawkish on inflation. Comfort on the core inflation (as it is expected to trend lower) along with hopes that the vegetable price spike would ease as fresh produce comes to the market, should keep the RBI away from further tightening of monetary policy.

Other macro issues:

There may not be any significant worries for India on the aggregate growth performance. Central government has accelerated its capital expenditures in Q1 and this should help push growth. However, there can be two specific worries:

Private consumption expenditure has not been growing and in some instances, we see negative Q-o-Q growths. The worry is that with food inflation on the higher side and with continuing tight monetary conditions, private consumption expenditure growth may be lagging.

Capital expenditure of the private sector has been lagging, despite a sharp improvement in the twin balance sheet – that of banks as also corporates. This is likely linked to the earlier point made. Domestic consumption demand is weak while global demand is also likely to weaken in months ahead with the anticipated slowdown in global growth. This leads to some haziness in the future demand prospects for manufacturers. Thus, private capex may continue to lag for more time. Some segments – such as steel and cement sectors may do relatively better on the capex front due to the infrastructure push by the government.

Credit growth of the banking sector has shown some signs of slowing. Excluding the impact of the HDFC Ltd-HDFC Bank merger, credit growth on July 14, 2023 was at 14.4%, lower than 15.7% as of end-March 2023. There has been a weakening of credit growth to most segments, including the retail segment. Banks are now assessing credit risks better with respect to the personal loan segment, considering the high inflation and high interest costs. We expect credit growth of the banking sector for FY24 at around 11-12% by end-March 2024.

Deposit growth has also slackened – mostly due to efforts of the RBI to reduce excess liquidity in the banking sector. Excluding the merger impact, deposit growth of the deposit growth is currently at around 12.3%, and would be even lower if one discounts the impact of the Rs2000/- demonetization impact. Most of the deposit growth is seen in the Term Deposit segment while CASA ratios have suffered for most banks. This is due to higher interest rate differential between the TD and the SA, and is likely to continue with the continuation of the tight monetary policy of the RBI. Past deposits are also getting repriced at higher rates and this is likely to have an impact on the margins of the banking sector as there could be some limitation of passing on the full extent to the customers.