India’s macroeconomic situation continues to present a tricky challenge to policymakers, especially those managing the monetary policy in the RBI. Earlier this month, data from the Ministry of Statistics and Programme Implementation (MoSPI) showed that retail inflation had moderated further to a three-month low of 6.77 per cent in October. It raised hopes that inflation had peaked — it hit an eight-year high of 7.8 per cent in April — and was likely to continue moderating from here on. Yet a closer look at the drivers of inflation reveals some serious concerns. In particular, it is noteworthy that while the headline inflation rate has moderated, core inflation (that is, inflation rate after stripping off the effects of the more volatile prices such as fuel and food) has touched 6.1 per cent. According to an analysis by Nomura Research, core inflation has hit a six-month high if one considers the monthly sequential momentum. Core goods inflation has gone up to 7.3 per cent. This suggests that inflation is not only high but also broad based and sticky. As a result, while inflation may still moderate, it would do so far more slowly than desired.
The flip-side of the picture is the growth rate of the economy. Here, too, the situation is iffy at best. Next week, MoSPI will release the data for gross domestic product (GDP) in the second quarter (July, August and September). Most street estimates suggest a growth of 6.5 per cent over the same quarter last year. On its own, a 6.5 per cent growth looks healthy, but when compared to the pre-Covid levels, it translates to a growth of a mere 2.5 per cent each year since 2019-20. What’s more, between the pincer effect of a global slowdown, which is resulting in a collapse of India’s exports, and the monetary tightening since May — RBI has raised the repo rate by 190 basis points — the full-year growth forecasts are being revised downwards rapidly. While the RBI is still sticking with an estimate of 7 per cent GDP growth in the current financial year, even government officials (as a report in this newspaper showed) are pencilling in a 6.5 per cent increase. Most forecasters suggest an even slower growth rate in the next financial year (2023-24).
So here’s the essential challenge facing the Monetary Policy Committee of the RBI as it sits down to deliberate its next stance in the first week of December: Inflation continues to be high and sticky while growth is still iffy and trending downward. The RBI’s main responsibility is to maintain price stability in the economy. Since retail inflation has stayed above RBI’s tolerance limit of 6 per cent since the start of 2022, the RBI is duty bound to first bring it down on priority by raising interest rates. The trouble is, doing so will surely risk further undermining India’s growth momentum.