RBI monetary policy: No urgency for back-to-back rate hikes, says expert

Forecasting the timing of the monetary policy action is a hazardous task when the expectation is of a very shallow rate hike cycle. At these times, monetary policy gets elevated to a ‘craft’ from an ‘art’.  Also, there are conflicting signals. Much lower than expected June CPI, range-bound oil prices/currency and mildly softer growth would be pitted against sustained elevated core and risks from high MSP increase, in the August meeting. 

The fear of an adverse base effect driven rise in June CPI turned out to be pretty much a false alarm. High frequency daily food price data indicates that the July print could surprise on the downside too. If one looks closely, the almost deflationary momentum in food inflation is beating all seasonal patterns and pulling down the headline CPI despite the surprisingly strong core CPI. 

The question in front of the MPC would be how much importance to give to the rear view mirror versus the crystal ball gazing of the future. Looking at the rear view mirror, would they be extrapolating the recent core inflation trends and historical patterns of MSP increase causing more generalised inflation? Or can patterns change? In our crystal ball, core inflation momentum could moderate going forward as activity indicators might have rolled over from their near-term highs, commodity price/exchange rate led cost-push pressure might have mostly been passed through and GST rate reductions could help on the margin. Besides, sustained adverse terms of trade against agriculture, very low rural wage growth, limited ability to procure under MSP and no significant global upswing in agricultural commodities might limit the MSP hike effect this time.

Samiran Chakraborty is Chief Economist, India for Citibank
In our base case, we expect RBI to stay on hold till the October policy to get a better sense of the MSP pass-through/monsoon outturn and decide on the next rate move. There should not be much urgency in delivering back to back rate hikes when there are significant uncertainties (both domestic and global) and the policy stance is still Neutral. The MPC has already established its credibility by moving early in June and adopting a ‘wait and watch’ tone now should not affect macro stability much. That said, we recognise that a ‘pause’ in August is not a done deal as the central bankers often get swayed more by core inflation. Also, large forecasting uncertainties because of noisy data might favour the rear mirror view than the crystal ball gazing.

Samiran Chakraborty is Chief Economist, India for Citibank

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