At its upcoming policy meeting this week, monetary policy committee (MPC) an extra thin line has to be drawn between pushing Development and keeping inflation under control. The disruption in the global supply chain has led to a manifold increase in commodity prices in the domestic market. Russia-Ukraine conflict And the growth of the economy has already taken a toll since the pandemic began. The economic challenges before the MPC this time are:
Inflation, which the Reserve Bank of India is mandated to control, is breaching the RBI’s target range. Consumer price index (CPI)-based inflation rose to 6.07 per cent in February from the central bank’s comfort zone of 2-6 per cent. Now, the MPC has the challenge of addressing inflation rates outside this comfortable zone.
inflation remains
In the last policy review in February, the RBI retained its inflation forecast for 2021-22 at 5.3 per cent, with Q4 at 5.7 per cent due to adverse base effects which eased later. However, it expected the CPI reading for January 2022 to move closer to the upper tolerance band, mainly due to an unfavorable base effect.
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 percent; Q3 at 4.0 percent; And Q4 at 4.2 percent, with the risks being broadly balanced.”
growth scenario
“The continued rise in international commodity prices, buoyant volatility in global financial markets and global supply constraints may add to risks to the outlook,” RBI had said in its previous policy. This time around, the situation has turned worse on the external front. Global supply chains were further hit for the Russo-Ukraine war, commodity prices became even more expensive and FPI sell-offs led to market volatility.
After the last policy meeting so far, rating agencies India Ratings, Moody’s and ICRA have revised downwards their growth projections for India on account of rising commodity prices and fresh supply chain issues arising out of the Russia-Ukraine conflict. The fresh COVID-19 wave in China also weighed in.
India Ratings has revised its GDP growth forecast for 2021-22 to 8.6 per cent, from 9.2 per cent estimated earlier. Moody’s Investors Service has lowered India’s growth forecast for 2022 to 9.1 percent from the earlier estimated 9.5 percent. ICRA has lowered India’s FY23 GDP growth forecast to 7.2 per cent from the earlier estimate of 8 per cent. FICCI expects GDP to grow at the rate of 7.4 per cent in this financial year.
market liquidity position
The Indian market has been witnessing investment outflows for quite some time now. Foreign portfolio investors have pulled out a net investment of Rs 88,135 crore in the last two months between February 1 and April 1. And, the outflow has worsened in March compared to February. This is due to the tightening of monetary policy around the world. Primarily, the recent rate hike and its anticipation prompted investors to withdraw money from India and move to the safe haven US.
The MPC will meet during April 6-8 to decide on policy interest rates. It is expected to keep the key repo rate unchanged, but will change its stance from the current ‘accommodative’ to ‘neutral’.
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