In its upcoming policy meet this week, the Monetary Policy Committee (MPC) will have to tread a extra thin line between pushing the growth and keeping inflation under check. Commodities prices in the domestic market have increased multifold due to global supply chain disruptions amid the Russia-Ukraine conflict and the economy growth has already taken a toll since the pandemic started. Here’re the economic challenges the MPC faces this time:
Inflation, which the Reserve Bank of India is mandated to control, is breaching the RBI’s target range. The Consumer Price Index (CPI)-based inflation marginally increased beyond the central bank’s comfort zone of 2-6 per cent to stand at 6.07 per cent in February. Now, the MPC has a challenge to address this out-of-comfort-zone inflation rate.Inflation Remains High
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In the previous policy review in February, the RBI retained its inflation projection for 2021-22 at 5.3 per cent, with Q4 at 5.7 per cent on account of unfavourable base effects that ease subsequently. However, it expected the CPI reading for January 2022 to move closer to the upper tolerance band, largely due to adverse base effects.
It had said, “CPI inflation for 2022-23 is projected at 4.5 per cent with Q1:2022-23 at 4.9 per cent; Q2 at 5.0 per cent; Q3 at 4.0 per cent; and Q4 at 4.2 per cent, with risks broadly balanced.”Growth Scenario
The RBI in its previous policy said, “The persistent increase in international commodity prices, surge in volatility of global financial markets and global supply bottlenecks can exacerbate risks to the outlook.” This time, the situation on the external front has turned to worse due to the Russia-Ukraine war. The global supply chain further hit, commodity prices got even costlier and volatility is there in the market on the back of FPI sell-off.
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After the last policy meet till now, rating agencies India Ratings, Moody’s and ICRA have revised downwards their growth projections for India due to elevated commodity prices and fresh supply chain issues arising from the Russia-Ukraine conflict. Fresh COVID-19 wave in China also weighed.
India Ratings has revised downwards its GDP growth forecast for 2021-22 to 8.6 per cent from the consensus 9.2 per cent projected earlier. Moody’s Investors Service has cut India’s growth forecast for 2022 to 9.1 per cent from the earlier estimated 9.5 per cent. ICRA has lowered India’s FY23 GDP growth forecast to 7.2 per cent from an earlier projection of 8 per cent. FICCI expects the GDP to grow 7.4 per cent this financial year.Market Liquidity Position
The Indian market has been witnessing investment outflows for quite some time. In the past two months between February 1 and April 1, foreign portfolio investors have pulled out a net investment of Rs 88,135 crore. And, the outflow has worsened in March as compared to February. It is due to tightening monetart policy across the globe. Majorly, the recent rate hike and its anticipation prompted investors to pull out money from India and move to safe-haven US.
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The MPC will meet during April 6-8 to decide on the policy interest rates. It is expected to keep the key repo rate unchanged but change its stance from the current ‘accommodative’ to ‘neutral’
