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Twenty-Second EGROW Shadow Monetary Policy Committee Meet held on June 3, 2022


Recording of the Event

Key Takeaways

  • Energy prices are likely to remain elevated due to oil and gas market specific factors, particularly sanctions on Russia.
  • Global slowdown is likely to bring down commodity prices, industrial inputs, and consumer goods.
  • Inflation is a supply side issue and could be transitory.
  • Green shoots in post-Covid recovery needs to be supported.
  • It is important to account for the impact on equity flows on the interest rate hike.
  • Use of CRR instrument may best be avoided or used later.
  • Going forward, RBI should target a real Repo rate ranging between -1 and 0.

Recommendation of EGROW Shadow MPC

Members of EGROW – 5

Repo rate

  • Increase by 25bps-2
  • Increase by 10-25bps-1
  • Increase by 35-40bps-1
  • Increase by more than 40 bps-1


  • Accommodative to neutral - 5

Non-Members- 3

Repo rate

  • Increase by 20-40bps- 2
  • Increase by more than 40 bps-1


  • Accommodative to neutral 1
  • No stance- 2

Detailed Views by Members of the EGROW Shadow MPC

1. Dr. Arvind Virmani, Chairman, EGROW Foundation

Repeated shocks due to the different waves of COVID don’t give time for normalcy to return. As a result, market fragmentation takes place. There is obviously an imbalance in the supply demand in different regions too. This inability to return to normalcy after a shock, results in building up of inflationary pressure. The shocks that have come in the recent times have been a consequence of the different variants of COVID and the ongoing Russia-Ukraine War. The latter has led to a supply shock across the world and it has been felt in India as well.

India has taken steps that include targeted fiscal and monetary policy to tackle market fragmentation. There has been huge stimulus given in USA even after normalization has happened that is an added pressure. By end-December 2021, there were concerns about the US and there was a shift in India’s monetary policy stance signalling towards accommodative from neutral. There was also a prediction that we would get imported inflation from the US. The recent Russia-Ukraine War has been the biggest shock, something completely unexpected, the resulting shock in oil prices has added to the imported inflation. India is the largest net oil exporter in the World.

The implication for India has been that the stance should change from accommodative to neutral to tackle inflationary pressures. Second, there will be no real effects overall. Inflation will come down when supply shocks will subside. However, inflationary expectations will continue to rise. Increase in oil prices from 80 USD/bbl to 120USD/bbl extreme case scenario will see high inflation rate which will pass through for a whole year. We do not call that inflation; the inflation is over; it is just a pass through. It is not continuous. If it leads to inflationary expectations then it will lead to higher inflation.

The RBI and the US Fed Reserve should focus on how to address and affect inflationary expectations so they don’t build up in this process. If nothing changes in a year, the effect of oil price will be seen in headline inflation being higher. Similarly, the wheat price will increase. But it is not inflationary if it doesn’t translate into inflationary expectations.

My three recommendations are that RBI should change monetary policy stance from accommodative to neutral, set a target for a real repo rate to be between -1 to 0 percent for December or March and lastly examine the credit growth. As long as the credit growth is low, there is not going to be any real problem in terms of excess demand.

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

We continue to expect the RBI MPC to lift the policy rate by 25bps on 8 June, atop 80bps so far, to combat inflation and offset Fed hikes. It should also shift the monetary policy stance to neutral from accommodative with Governor Das already prioritising inflation over growth since April. Looking ahead, the RBI MPC is likely to lift the repo rate another 75bps by April 2023. Second, we expect it to raise banks’ HTM limit by 1% of book extended to FY26. Finally, the RBI will likely lift the FCNRB deposit rate cap over Libor by 50bps to augment FX reserves.

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

India’s inflation trends are heavily skewed on the upside and is expected to remain beyond the MPC’s threshold upper limit of 6% in the foreseeable future. The swiftly upward moving risks had prompted an off-cycle 40bps repo rate hike in early May, with a clear guidance in terms of further frontloaded actions necessary to tame inflation. While the need to anchor inflationary expectations is apt, we reckon that much of the elevated inflationary pressures are supply-led, and hence there remains limited scope for MPC to manage inflation without choking demand. Monetary tightness needs to be complemented with the supply-side fiscal interventions to ease price pressures. Appropriately so, the government has taken wide ranging counter-cyclical measures lately to absorb the domestic price pressures but that clearly puts further burden on India’s already weak public finance situation limiting the ability to tackle any incremental demand or supply side shocks.

Overall, we expect the MPC to revise upward the inflation trajectory by 70-80bps accounting for the recent upside price pressures. We estimate the headline FY2023 CPI reading at 6.4% (with average crude prices at US$105/bbl) but given the persistence of supply side issues amidst geopolitical conflicts higher crude oil prices could risk CPI inflation averaging around 7.3%. On the other hand, the formal economy continues to remain broadly resilient, although some fatigue has been witnessed lately and the we expect elevated inflation to weigh on consumer demand. We expect FY23 GDP at 7.3%, with a downward bias—notably much of the robust headline is coming on the back of a strong favourable effect led expected 1QFY23, with rest of the quarters being fairly tepid.

From the policy withdrawal perspective, RBI in the last two months has moved quite aggressively and swiftly. The weighted average overnight rates have risen by 80-90bps since the April MPC policy. The recent supply side interventions by the government have clearly provided room for the MPC to avoid disruptive tightening. We expect a repo rate hike of 35-40bps in the upcoming June policy, with the repo rate likely around 5.5-5.75% by the end of FY2023E. Notably, the tussle against inflation, though painful in the near term, could be shallower and shorter than expected, with a likely terminal rate around 6-6.25%. Furthermore, on the liquidity management front we expect CRR hike of additional 50bps, but given the recent sharp moderation in surplus, we see the likely action in August when government spends begin picking up.

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

The average CPI inflation is expected to be 6.4-6.5 per cent with sub-6 per cent only in 4Q 2022-23. GDP growth is likely to be 7.3 per cent. While RBI has to play a role in anchoring inflation expectations, given the role of supply problems particularly on energy and food, the government will have to play a key role in managing inflation expectations. Global slowdown and China restart likely to bring down commodity prices, industrial inputs and consumer goods. Energy prices are likely to remain elevate due to oil and gas market specific factors, particularly sanctions on Russia. A 25 bps increase in repo rate, no change in CRR. A change in monetary policy stance from accommodative to neutral is recommended.

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

The 4 +/- 2 per cent inflation target in a young demographic country is probably too low and should have been a little higher. As it is, the relevance of IT in a young demographic country on a recovery path after a severe shock, needs to be examined. As far as inflation is concerned, it is obvious where the increase is taking place, mainly, oil and transport, and these are transitory because of external factors.

The Russia- Ukraine War, which is taking its toll on the World, is going to impact the price of corn, barley, wheat and sunflower seeds, as substantive amounts are produced in Russia and Ukraine. As far as India is concerned, the war will further affect the price of fertilizers- nitrates and phosphates especially as a bulk of them come from Russia, so it is going to impact agricultural production and prices in long run, globally. When it comes to fuel, coal is an important component from Russia impacted by the war between these two countries. Others like Aluminium, pig iron, oil cake, nickel and palladium, are also expected to be impacted. Since, the price rise is caused by the war and it is transitory, it can be argued that there was no justification to have a hasty response in terms of timing and size of that 40 bps rise on May 4 in the interest rate which was almost like a sledgehammer on an economy that had already embarked on a path of recovery. After all, the CPI was approaching 7 percent where 30-year average is 7.4 percent CPI – IW) while in the USA inflation had crossed 8 percent where 30-year average is around 2.4 percent.

The latest IIP data released in May 2022 revealed that the industry has staged a good recovery. Going by the components - manufacturing of textiles, paper and paper products, furniture, etc., shows that offices are reopening and people are resuming normal routine, reflecting the recovery. When a sledgehammer hike in interest rates is used, obviously, it will influence demand as also growth and slowdown can set in.

There is no doubt that interest rates across the world have increased but not all have used the sledgehammer. In the UK and Australia, it has increased by 25 bps, in the US by 50 bps which is quite high, Brazil has seen an increase of 100 bps. So, in India, when the recovery is beginning and doing so well, using a high interest rate hike which impacts a large number of industries can really affect growth adversely. While USA can afford high interest rate hike which may lead to a recession, India needs to tread a cautious path.

Knowing that there is a global slowdown expected in 2023 based on the data released by the IMF, our exports are certainly going to face a challenge. This will have implications for the manufacturing sector.

So the need is to carefully isolate the objective of interest rate hike: inflation or inflation expectation? The change in the stance from accommodative to neutral conveys a lot for expectations. According to an IIM-Ahmedabad release, after the recent May 4 hike in the interest rate, the inflation expectations for the year ahead fell from 6.12 per cent to 6.02 per cent which is not so significant. This clearly shows that market understands that prices are high for supply side reasons and raising interest rates may not lower inflation or expectations.

Going by a RBI report on credit growth, credit to agriculture in March ‘22 (9.9 per cent) is still less than that recorded in March ‘21 (10.5 per cent). Credit to medium industries has seen a significant improvement in March ‘22 (71.4 per cent) against March ‘21 (34.5 per cent). Credit to micro and small industries posted a faster growth rate in March ‘22 (21.5 per cent) from March ‘21 (3.9 per cent). Credit to large industries which was mainly contracting till December 2021, turned positive in January 2022 and stood at 0.9 per cent in March ‘22. Credit growth to industry has picked up recently. Now, the increased interest rate will adversely impact and that may be worrisome for the recovery.

The IIP and core industries activity has seen construction playing an important role. Steel and cement are performing very well. Increase in interest rate impacts construction activity which affects the whole economy including employment.

So, the need is to moderate expectations, in view of the green shoots which are appearing, there is no harm in stepping back now and raising the Repo rate by 10 - 25 bps and moving the stance from accommodative to neutral.

The non-performing assets (NPAs) are expected to increase in the period ahead. The mortality rate is high for MSME’s. The stressed assets could increase in infrastructure which implies rising burden on public sector banks and the need for recapitalisation from the Union Budget. The number of cases waiting to enter NCLT for resolution is rising and the fear that once normalcy returns, the recognition of stressed assets and NPAs would increase. Therefore, it would be better that baby steps are taken on interest rates as the inflation is transitory and corrective measure, when warranted, can be taken swiftly.

Lastly, the CRR instrument should not be used at this point of time. It is better to retain it for later or not involve CRR as an active monetary policy tool when recovery is taking place and bank credit is expanding.

Guest Panelists– Specialist from Market

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

The RBI's rate hike in May was quite a surprise to me as I was expecting a continued pro-growth narrative from the RBI, especially given the clear supply-side drivers to inflation. While inflation expectations are important, it did seem that maybe these inflation-expectations are being overemphasised; than one probably would need to.

FY23 is expected to grow at 7%, but one must note here that this is largely due to base effects. The inherent underlying sustainable trend is more hovering around a 5.5-6.5% band; probably at the lower end of the band?

Without getting into the details that CPI is largely vegetables dominated (apart from energy), for the economy as a whole, elevated inflation in itself is a dent on consumption. Therefore, any aggressive rate hikes would only worsen the demand scenario on the ground.

This becomes even more important when we realise that the government is banking on higher than budgeted tax revenues to support its increased spending projections for FY23. It is this confidence that gives the government the comfort that it need not add to its market borrowing program. Aggressive rate hikes would mean a stronger dent on domestic growth and a direct hit on the fiscal revenues. This would eventually lead to a higher fiscal deficit, more market borrowing and feed into higher rates; in a way self-inflicted.

Therefore, it would be appropriate to maybe do another 20-40bps of rate hikes in its June policy and be done with the rate hikes; managing the markets with language for the rest of the year. Because at this nascent stage of recovery, when India does not have an inflation problem like the west; priority must be growth. The problem appears to be more of that with the inflation mandate than inflation as a problem for India (?).

Therefore, I am unable to wrap my head around the market narrative of an aggressive 100-150bps of incremental rate hikes.

The need of the hour is probably to have a much less aggressive rate cycle than the markets expect and focus energies on managing the rupee, eventual liquidity outcomes and yields (by sterilisation?). Especially given that it is ECB and net FDI that are helping support India's unsustainable trade deficits. And ECB flows tend to wane during rising rate environments.

Guests from ASSOCHAM

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

RBI emergency MPC in May, had increased the interest rate by 40 basis points, on the account of raising inflation in domestic as well global markets. This must be seen as an effort by RBI to avoid a large increase in the upcoming MPC meeting in June. The current scenario is such that exports have increased to 400 bn USD, and urban growth is doing well. This is also augmented by a double-digit demand in urban demand. However, rural growth is showing some weakness and it is expected that the government will rectify this with robust expenditure including further capital expenditure. The economy had also witnessed a 11 per cent increase in credit growth and a surplus liquidity in the system, but the forecast of IMF suggests a global slowdown with reduced growth global growth rate in FY23. In light of all the above observations, and further deducing that inflation is mainly caused by supply side issues, it is expected that the RBI will increase the repo rate by about 25 to 50 basis points.

2. Shri Raman Aggarwal, Director, Finance Industry Development Council

"Flexibility" has to be an essential element of any regulatory norm prescribed for small borrowers whose cash inflows are uncertain and unpredictable, or borrowers whose cash inflows happen only once a month or quarter. It is imprudent to prescribe the same norms for a loan of Rs.50,000/- given to a small borrower and a loan of Rs.500 crores given to a large corporate entity. Further, a loan once classified as a NPA can be upgraded back to standard only when the borrower repays the total overdue amount. Both these provisions are bound to result in a greater number of borrowers getting the NPA tag making them untouchables in the eyes of all lenders.