At its upcoming policy meeting this week, the Monetary Policy Committee (MPC) will have to walk an extra fine line between boosting growth and keeping inflation under control. Commodity prices in the domestic market have risen multiple times due to disruptions to the global supply chain during the conflict between Russia and Ukraine, and the growth of the economy has already taken its toll since the start of the pandemic. Here are the economic challenges facing the MPC this time around:
Inflation, which the Reserve Bank of India is required to monitor, exceeds the target range of the RBI. Inflation based on the consumer price index (CPI) rose marginally above the central bank’s comfort zone of 2-6 percent and stood at 6.07 percent in February. Now the MPC faces the challenge of tackling this inflation outside its comfort zone.
Inflation remains high
At the last policy review in February, the RBI maintained its inflation forecast for 2021-22 at 5.3 percent, with Q4 at 5.7 percent due to unfavorable base effects decreasing thereafter. However, it expected the January 2022 CPI reading to move closer to the upper tolerance band, largely due to unfavorable base effects.
It had said: “CPI inflation for 2022-23 is forecast at 4.5 percent and Q1:2022-23 at 4.9 percent; Q2 at 5.0 percent; Q3 at 4.0 percent; and Q4 at 4.2 percent, with risks broadly balanced.”
Growth scenario
The RBI said in its previous policy, “The continued rise in international commodity prices, the strong volatility of global financial markets and global supply bottlenecks may increase risks to the outlook.” This time, the situation on the external front has deteriorated due to the war between Russia and Ukraine. The global supply chain was further affected, raw material prices became even more expensive and there is market volatility due to the sell-off of FPI.
After the last policy meeting to date, the rating agencies India Ratings, Moody’s and ICRA have revised their growth forecasts for India downwards due to increased commodity prices and new supply chain problems caused by the conflict between Russia and Ukraine. New COVID-19 wave in China also weighed in.
India Ratings has revised its 2021-2022 GDP growth forecast downwards to 8.6 percent from the consensus of 9.2 percent previously forecast. Moody’s Investors Service has cut India’s 2022 growth forecast to 9.1 percent from its previously estimated 9.5 percent. ICRA has cut India’s FY23 GDP growth forecast to 7.2 percent, compared to a previous forecast of 8 percent. FICCI expects GDP to grow by 7.4 percent this fiscal year.
Market liquidity position
The Indian market has been witnessing an outflow of investment for quite some time now. In the past two months between February 1 and April 1, foreign portfolio investors withdrew a net investment of Rs 88,135 crore. And the outflow deteriorated in March compared to February. It is due to tightening monetary policy around the world. In particular, the recent rate hike and its anticipation has prompted investors to take money out of India and move to the safe haven of the US.
The MPC will meet from April 6-8 to decide on key interest rates. The main repo rate is expected to remain unchanged, but its stance will change from the current ‘accommodative’ to ‘neutral’.
Read all the latest news, breaking news and IPL 2022 Live Updates here.