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RBI's 4.5% retail inflation prediction will keep the low interest rate tap open 

RBI's 4.5% retail inflation prediction will keep the low interest rate tap open 

The MPC's targeted inflation of 4 per cent with a band of 2 to 6 per cent per cent acts as a window for RBI to keep the interest rate low. 

The RBI has projected a real GDP of 7.8 per cent in 2022-23 The RBI has projected a real GDP of 7.8 per cent in 2022-23

The Reserve Bank of India (RBI) has projected a knee-high retail inflation or consumer price index (CPI) of 4.5 per cent in 2022-23, which leaves scope for the monetary policy committee (MPC) to keep the short-term interest rates low for a longer period to support the nascent economic recovery.

The RBI has kept the policy rate benchmark, the repo rate, unchanged at 4 per cent for the last 27 months. The repo rate is the rate at which banks borrow funds from the RBI to meet their daily temporary mismatches. In fact, it influences their cost of funds to lend in the market to retail and corporate borrowers. 

The MPC's targeted inflation of 4 per cent with a band of 2 to 6 per cent per cent acts as a window for RBI to keep the interest rate low. 

Despite the CPI being 5.3 per cent in 2021-22, which is closer to the MPC's higher band, the RBI kept the repo rate unchanged. The central bank has now forecasted a lower inflation rate of 4.5 per cent for the next fiscal. "The MPC is of the opinion that the inflation print is largely driven by the base effect in the near term and given the benign outlook on food inflation, it doesn’t have any serious concerns on this front," says Suman Chowdhury, Chief Analytical Officer, Acuité Ratings & Research.

The lower interest rate is expected to boost the nascent economic recovery. The RBI has projected a real GDP of 7.8 per cent in 2022-23. The Union Budget, however, has projected a higher growth rate of 9.2 per cent for 2022-23.

The monetary policy is actually projecting a very optimistic scenario at a time when the inflation fears are pushing the interest rates higher globally. The tightening of easy liquidity conditions in the market has already started in many countries. The global central bankers are already hiking interest rates to contain the inflationary pressure. US Fed chairman Jerome Powell had said that he expects a series of interest rate hikes in 2022, with reduced bond purchases. Bank of England has already hiked the short-term interest rates for the first time in more than three years. Similarly, the central banks of Russia, Mexico, and dozen others have raised their short-term interest rates

The danger from the high oil prices is also very real. In fact, the Economic Survey last week had listed out the threat of imported inflation from the depreciating rupee value against the US dollar and the rising global oil prices that have crossed $90 a barrel in the international market. There are actually expectation of domestic petrol and diesel prices to rise after the elections in key states like UP and Punjab.  The Economic Survey had stated that "although the high wholesale price index (WPI) inflation is partly due to base effects and will even out, India does need to be wary of imported inflation, especially from elevated global energy prices."

In addition, the inflation projection seems to ignore the impact of large fiscal expansion post the pandemic with higher market borrowings. The government has budgeted a market borrowing of Rs 14.3 lakh crores. Union Budget has targeted a fiscal deficit target of 6.4 per cent of GDP in 2022-23 as compared to 6.9 per cent in 2021-23. Clearly, the government is going slow on fiscal consolidation path of achieving a fiscal deficit of 4.5 per cent by 2025-26.

The fiscal deficit has actually widened marginally from budgeted 6.8 per cent to revised estimates of 6.9 per cent in 2022-21.

Also read: RBI's MPC projects CPI inflation for FY22 at 5.3%, FY23 at 4.5%

Also read: RBI keeps repo, reverse repo rates unchanged for 10th time in a row

Also read: RBI's MPC meet key takeaways: Repo rate, liquidity, inflation, GDP, and more

Published on: Feb 10, 2022, 11:58 AM IST
Posted by: Mehak Agarwal, Feb 10, 2022, 11:54 AM IST