No pause in sight: A 25-basis-point rate increase in Feb can't be ruled out

The key takeaway from the governor's 3,000-word statement is 'the battle against inflation is not over'

There are no surprises in the Reserve Bank of India’s (RBI’s) latest monetary policy – the last for calendar year 2022. The repo rate has been hiked by 35 basis points (bps) – which is par for the course – as mentioned in the December 5 column. One basis point is a hundredth of a percentage point.

All eyes have been firmly on the future guidance. Is the Monetary Policy Committee (MPC), the central bank’s rate-setting body, through with its rate-increase cycle, which started in May 2022 and has raised the rate from 4 per cent to 6.25 per cent, to fight entrenched inflation? Certainly not.

To support this, many are quoting para seven of RBI Governor Shaktikanata Das’s statement.

“On balance, the MPC was of the view that further calibrated monetary policy action is warranted to keep inflation expectations anchored, break core inflation persistence and contain second round effects. These actions will strengthen the medium-term growth prospects of the Indian economy.”

But this paragraph refers to the MPC’s approach to the current situation and explains why it has gone for a rate increase (in a 5-1 decision). It doesn’t explain its outlook for the future.

So, is the RBI through with its rate-increase cycle? Should we expect a pause at the next MPC meeting in February?

No. Look at para 15 of the governor’s statement:

“GDP growth in India remains resilient and inflation is expected to moderate; but the battle against inflation is not over. Pressure points from high and sticky core inflation and exposure of food inflation to international factors and weather-related events do remain. While being watchful of the impact of our earlier monetary policy actions, we will keep Arjuna’s eye on the evolving inflation dynamics and be ready to act as may be necessary. Our actions will be nimble and in the best interest of the economy. The aspect of growth will obviously be kept in mind.”

Yet another para of the governor’s statement sums up the RBI’s future plan of action – para 30.

“The course of our future policy will duly consider new data releases and the evolving outlook of the economy as well as the effect of our past actions.”

The RBI has dialled down to a 35-bp rate increase after a series of three 50-bp hikes. Taking this forward, I will not be surprised if there is another 25-bp rate increase in February immediately after the Union Budget – the last before the 2024 general elections.

By that time, the RBI will have the November and December data for Consumer Price Index (CPI) - based inflation on its table. Also the mid-December and early-February US Federal Reserve rate hikes will have an impact on the MPC’s call.

For the record, the last time we had seen India’s policy rate at 6.25 per cent was in February 2019. Announcing a rate cut (from 6.5 per cent to 6.25 per cent), the governor had expected the headline inflation to remain contained below or at its target of 4 per cent.

(In February 2019, the CPI-based inflation rate was 2.57 per cent, higher than the 1.97 per cent in January 2019; it rose to 2.86 per cent in March.) It was estimated at 3.2-3.4 per cent in the first half of 2019-20 and 3.9 per cent in the third quarter of 2019-20.

Can the RBI stop at 6.25 per cent when the inflation rate is projected at 6.7 per cent in 2022-23?

The RBI has left the annual inflation estimate unchanged but tweaked the quarterly estimates – 6.6 per cent for the third quarter and 5.9 per cent for the fourth quarter of the current financial year, with risks evenly balanced. The inflation rate is projected at 5 per cent for the first quarter and 5.4 per cent for the second quarter of the next financial year, “on the assumption of a normal monsoon”. 

To ensure a positive real rate, we may need to raise the policy rate to 6.5 per cent before pressing the pause button.

A day after the World Bank raised India’s 2022-23 growth forecast from 6.5 per cent to 6.9 per cent, a pragmatic RBI has cut it to 6.8 per cent, from its earlier projection of 7 per cent “with risks evenly balanced”. It has concerns about growth, in order to secure which it wants to bottle the inflation genie.

The key takeaway from the governor's 3,000-word statement are these seven words – “the battle against inflation is not over”.

While the action is in sync with market expectations, many find the statement hawkish. Certainly, it is not dovish. But can we call Das a hawk?

I remember a January 2014 conversation between the then governor Raghuram Rajan and deputy governor Urjit Patel with the media. After Rajan surprised the market with an increase in policy rate (MPC was not in place then), he took to ornithology to explain the policy stance, saying: "We are neither hawks, nor doves. We are actually owls." Patel chipped in, saying: "An owl is traditionally a symbol of wisdom. We are neither doves nor hawks but owls, and we are vigilant when others are resting."

It’s reassuring to see Das not getting his guards down; he remains vigilant as ever. Of course, no other central bank is resting, either.