RBI is okay on macro, thanks to benign global environment

The minutes reflect the RBI’s growing comfort on the current macro environment, despite some caution on the inflation trajectory ahead. Experts see FY24E inflation at 5.4 per cent

The minutes of the December MPC meeting reflect RBI’s comfort on the macro environment, on account of the benign global environment amid a domestic Goldilocks scenario. This is largely due to the benign global environment, moderating core inflation and robust domestic growth. Barring Prof. Varma, all MPC members, emphasized the need for the policy to stay restrictive as the projected inflation remains above four per cent.

The frequency of food price shocks causing headline inflation to shoot up was also mentioned as a key risk, with Dr. Michael Patra specifically stating that the policy should stay restrictive till such spikes can be seen off without the danger of the second-order effects.

Meanwhile, Prof. Varma opined that the projected inflation trajectory implied a real policy rate of more than two per cent, which is much higher than needed. He suggested that the real policy rate ought to be brought down to 1.5 per cent in the coming months, as confidence on the downward inflation trajectory rises.

Dr. Goyal cautioned against the risk of over-tightening if inflation approaches four per cent by mid-2024, even as the repo rate remains unchanged. The MPC, nevertheless, recognised the persistent decline in core inflation as evidence that policy actions so far are working, and expect this to continue as the impact of policy actions plays out further and input costs log softer growth.

Liquidity management did not seem to be as large a concern as in the previous meeting with tighter domestic liquidity in December. This supports Emkay Global’s view that the mention of OMO sales back then was merely a way to depict implied policy bias for higher rates and offer higher risks to the world as well as to anchor INR amid a volatile and unfavourable global macro backdrop.The better-than-expected GDP growth figures for FY24 so far drew some divergent responses from the MPC.

According to Dr. Ranjan, the higher growth momentum, taken together with improved capital formation and total factor productivity, may reflect a sustainable improvement in the potential output level of the economy. This structural change could explain the robust growth along with the falling core inflation.

Dr. Goyal, concurring with this view, opined that the real GDP growth of seven per cent does not necessarily mean that the potential output level has been reached, if reforms raise growth on a structural basis. Such an outcome would not put pressure on core inflation via excess demand.

However, Dr. Patra believes that the higher growth increases the likelihood of demand-pull factors influencing inflation more in coming months, which will further amplify any supply shocks. The minutes reflect the RBI’s growing comfort on the current macro environment, despite some caution on the inflation trajectory ahead. Experts see FY24E inflation at 5.4 per cent. In fact, analysts believe that the RBI will not precede the Fed in any policy reversal in CY24.