The rate hike cycle may be nearing its peak

The rate hike cycle may be nearing its peak

Even as inflation concerns persist, growing dissent within MPC alludes to some easing in the quantum of rate hikes.

In its last scheduled meeting of the calendar year, the Monetary Policy Committee of the Reserve Bank of India voted to raise the benchmark policy repo rate by 35 basis points. It now stands at 6.25 per cent. The decision, in line with the consensus, was passed with a vote of 5-1 with member, Jayanth Varma, voting against the hike. The committee also kept its stance unchanged, pledging to remain focused on the withdrawal of accommodation. This stance was, however, objected to by two members, namely Jayanth Varma and Ashima Goyal. The growing dissent within the MPC suggests that, notwithstanding RBI Governor Shaktikanta Das’s statement that seems to indicate that the committee is not done raising rates, the rate hike cycle is nearing its peak.

Inflation, however, continues to remain a concern, despite its recent softening. In October, headline retail inflation fell to 6.77 per cent, from 7.41 per cent in September. However, much of the decline was on account of a fall in food inflation — the consumer food price index had declined to 7.01 per cent in October, from 8.6 per cent in September. But core inflation, which excludes the volatile food and fuel components, is not showing any signs of moderation. This suggests continuing price pressures in the economy. The RBI governor also noted in his statement that core inflation remains sticky. The policy statement is thus more hawkish than expected. It notes that the “battle against inflation is not over”, and further policy action is needed to keep “inflation expectations anchored, break core inflation persistence and contain second round effects”. Inflation has remained above the upper threshold of the RBI’s inflation targeting framework for 10 straight months. The central bank is, however, hopeful of price pressures easing in the economy. It has projected inflation at 6.6 per cent in the third quarter, trending thereafter to 5.9 per cent in the fourth quarter, and averaging 5.2 per cent in the first half of the next financial year.

Alongside, the RBI has also lowered its forecast for growth to 6.8 per cent this year, down from its earlier assessment of 7 per cent made in the September policy, and 7.2 per cent in the August policy. It noted that the changing assessments reflect the risks to growth from “protracted geopolitical tensions, tightening global financial conditions and slowing external demand.” Considering the changing economic conditions, the policy apparatus must be guided by the imperative of preserving macroeconomic stability.