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Informist, Tuesday, Oct. 8, 2024

 

By Siddharth Upasani

 

MUMBAI - There is a general consensus that recent high-frequency data is indicative of some softness in growth. The question from a monetary policy perspective is whether the numbers are weak enough for the Reserve Bank of India to perhaps not be as confident about the economy as it has been in the past. Even for the inflation-targeting RBI, the main cue for lowering rates will come from any signs of economic weakness because it is the resilience in growth that has allowed the central bank to patiently wait for the last mile of disinflation to play out longer than anyone expected.

 

To be sure, Governor Shaktikanta Das had good reason to brush away the lower-than-expected GDP growth of 6.7% for Apr-Jun in early September. After all, government spending was subdued due to the Lok Sabha elections. However, the central bank has only become more bullish about its growth forecasts--at least unofficially.

 

According to RBI staff's internal estimates, as detailed in last month's State of the Economy article, GDP growth in 2024-25 (Apr-Mar) is seen at 7.3%, 10 basis points higher than the central bank's official forecast. But the same internal model sees growth missing the RBI's projection of 7.2% for Jul-Sept by 20 bps.

 

UNCERTAINTIES GALORE

Of course, not a lot should be read into these minor differences given how fraught with risk forecasting is even in the best of times. But these differences grow larger beyond the second quarter: for Oct-Dec, the RBI staff's internal model pegs growth at 8.4% as against the official view of 7.3%, 6.6% versus 7.2% for Jan-Mar, and 8.0% versus 7.2% for the first quarter of FY26. Again, these are only staff estimates, although it is worth noting that Deputy Governor Michael Patra, who is in charge of the monetary policy department, was one of the co-authors of the article.

 

Clearly, the RBI's assessment of growth matters; robust numbers so far have allowed its representatives on the Monetary Policy Committee to leave the repo rate unchanged at 6.50% for almost 20 months to ensure inflation cools down to the 4% target. But what of the new external members? Apart from Saugata Bhattacharya--who argued for lower interest rates in a newspaper column in August--very little is known of Ram Singh and Nagesh Kumar's views on growth and inflation.

 

One can expect the RBI members on the MPC to maintain a confident outlook on growth purely because the bar is very high to perform a sharp U-turn in the view. Second, the central bank knows that unless the MPC's communication is on-point, any concerns it voices on growth run the risk of denting confidence.

 

There is also the small matter of subjective judgement and how it influences monetary policy formulation. In his statement in the minutes of the August meeting of the MPC, Governor Das had seemingly dismissed model-based suggestions on derived interest rates such as the natural or real rate. "Policy making in the real world cannot be based on an abstract, theoretical and model specific construct which is unobservable and time varying," Das had said. Maybe the same reasoning can be applied to the RBI staff's rosy internal growth forecasts.

 

MORE INFLATION WARNINGS

If there is some uncertainty about how the new-look MPC will assess growth prospects, the same cannot be said for inflation. The same State of the Economy article that forecast impressive growth numbers in the coming quarters also warned that an unfavourable base effect may "haunt" the September CPI inflation print.

 

After finally falling below the medium-term target of 4% in July after a gap of nearly five years--and staying there in August--CPI inflation is set to rebound to around 5% in September, data for which will be released next week. And even though global commodity prices have cooled appreciably, food prices remain a sizeable thorn in the MPC's side. On balance, it would not be unreasonable to expect India's rate-setters to continue to be cautious about the outlook for inflation.

 

Does this mean the repo rate will remain unchanged for the 10th meeting in a row on Wednesday? Probably. But even if it is, this week's interest rate decision as well as the minutes of the meeting will be crucial in determining how the upcoming easing cycle pans out.  End

 

Edited by Vandana Hingorani

 

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