Inflation, external pressure priority over growth: Finance ministry

When Finance Minister Nirmala Sitharaman said in early September that not all tools to fight inflation were under the remit of monetary policy and that the Reserve Bank of India (RBI) might not need to synchronise its monetary policy actions to western central banks as much, many took it as a sign of the minister hinting that growth should be prioritised.

But, as the Monetary Policy Committee (MPC) hiked the repo rate by 50 basis points on Friday, taking the total benchmark interest rate hikes this year to 190 bps, officials in North Block said they were in lockstep with the RBI and that managing inflation and external sector pressures took precedence over growth.

“There is no need for an obsession with 7 per cent growth. Even at, say 6 per cent growth, India can count itself among the fast-growing major economies. Growth will be impacted if inflation is not controlled and if we cannot protect ourselves from external upheavals,” said a senior government official.

The MPC also cut its FY23 GDP growth forecast to 7 per cent from 7.2 per cent, with Governor Shaktikanta Das acknowledging that there were downside risks to economic growth.

“Though commodity prices have come down, we don’t know where they are headed in winter, especially with what is happening in Europe. Monetary tightening will continue in western central banks and the risk of recession in advanced economies is real,” said a second official.

With allegations by NATO of Russian sabotage behind the rupturing of Nord Stream gas pipelines, the geopolitical situation in Europe is expected to remain tense.

This week, global markets remained turbulent, recession worries drained stocks, and the dollar surged against other currencies, including the rupee.

India’s current account deficit (CAD) in April-June was at $23.9 billion, or 2.8 per cent of gross domestic product (GDP), much higher than the $13.4 billion, or 1.5 per cent of GDP, in January-March 2022, the RBI said on Thursday.

India has faced upward pressure on its import bill in 2022 because Russia’s invasion of Ukraine in late February led to a sharp rise in prices of commodities across the globe.

During April-August, India’s trade deficit rose to $125.22 billion versus $53.78 billion the same time last year. So far in 2022, the rupee has depreciated 9.2 per cent against the dollar.