By Prarthana Mitra
Based on the evolving macroeconomic domestic situation and the complex global environment, the Monetary Policy Committee (MPC) convened to discuss the current trends of inflation on Friday and suggested measures to control it in their fourth Bi-monthly Monetary Policy Statement.
This policy review arrives at a time when oil prices and U.S. interest rates are at an all-time high, the Indian rupee is at a record low pressured by a widening current account deficit, making credit markets nervous.
On containing inflation
The committee arrived at an unprecedented decision to keep the policy repo rate and the reverse repo rate unchanged at 6.5 percent, which means that the marginal standing facility (MSF) rate and the Bank Rate stays at 6.75 percent. This comes after MPC raised the benchmark repo rate twice this year, taking it from 6 percent to 6.5 percent. But in light of the prevailing uncertainties, the committee maintained a neutral stance till August.
This calibrated tightening of the monetary policy is, as many claim, in keeping with the target to anchor CPI inflation at 4% and simultaneously encouraging growth. Mr. Surendra Hiranandani, Chairman and MD of House of Hiranandani, spoke to Qrius about how sharply the currency and equity market reacted as soon as another rate hike was anticipated to curb inflationary pressures.
However, the Central Bank seems to have taken the broader economic and liquidity scenario into account, he said. “The tightening of the stance indicates that more hikes could happen in the coming months. It is important to note that interest rates and regulation will decide the long-term success of the economy and the real estate sector.”
Abheek Barua, Chief Economist of HDFC Bank commented on the RBI Policy calling it “a risky move” since the market was positioned for a rate hike, purely as a rupee defence. “In its absence currency and asset markets could see sharper corrections. A narrow focus on inflation targets perhaps not desirable in the middle of a financial crisis. Any change in stance suggests that the rate hike could still come in the coming months,” he told Qrius.
On preserving growth
Among other domestic takeaways, the report noted a growth in the real GDP to a “ninequarter high” in the first quarter, “extending the sequential acceleration to four successive quarters.” A considerable rise in private final consumption expenditure and export further resulted in high urban and rural spending, although government final consumption expenditure decreased in proportion.
Agricultural growth picked up compared to the service sector, possibly due to increase in production of rice, pulses and coarse cereals alongside a sustained expansion in livestock products, forestry and fisheries. Rapid industrialisation under the Modi government continues to bear fruit as industrial production accelerated in June-July, mainly due to consumer durables, notably two-wheelers, readymade garments, stainless steel utensils, auto components and spares, and accessories. Retail and food inflation also fell in the third quarter, bringing respite to the unabated hike in fuel prices.
On the global economic uncertainties
Since the last MPC meeting in August 2018, global economic fluctuations have taken a toll on the rupee and crude oil prices, with a marked crisis in the third quarter of FY2018-19 especially on major emerging market economies. At the same time, strong economic activity was recorded in advanced economies like the US owing to a robust equity market and industrial sector. The report further noted Japan’s consistent momentum, compared to other Asian nations including economic leader China.
According to the statement, “Growth in global trade is weakening as reflected in export orders and automobile production and sales. Crude oil prices…rebounded on expectation of reduced 2 supplies due to sanctions on Iran and falling US stockpiles.” In the Euro area, inflation pressures have been sustained by elevated crude prices, the committee noted. Gold prices have also declined steadily on a strong US dollar.
Impact and future trajectory
All of this has resulted in currency depreciations in emerging economies, which is an understatement as far as the rupee is concerned. The Indian rupee breached the 74-mark at the end of Friday, which according to RBI governor Urjit Patel, is still a better performance than its peers.
Taking all these factors into account, the committee predicted that both growth and inflation will continue well into 2019-20, where inflation is projected at a 4.8%, depending on a few domestic and international market forces. Firstly, the measures aimed at ensuring remunerative prices to farmers for their produce may shake the agricultural revenue to an unpredictable extent. Additionally, oil prices are most likely to continue rising, especially if the response of oil-producing nations to supply disruptions from geopolitical tensions is not adequate.
This ties in directly to the current volatility in global financial markets, which will further increase the upside risks to inflation in the coming months. Some of the blow may be softened by the 2.50 per litre price cut in domestic fuel prices announced by the government on Thursday, according to economists.