RBI may ‘kill excess demand’ in economy in six-eight months
With inflation remaining at elevated levels, central banks around the world, including the Reserve Bank of India (RBI), will kill excess demand in economy over the next six to eight months, sources in the know said. They also indicated that there could be a rate hike in June, when the inflation forecast for the current financial year would be raised.
The RBI, the sources said, might announce more steps such as raising the limit on held-to-maturity (HTM) bonds to support government borrowings but might not come out with any further quantitative easing GSAP (Government Securities Acquisition Programme) measures.
The RBI will “certainly” raise the inflation forecast again in June, as it did not want to do it in the off-cycle emergency meeting held earlier this month, said the sources.
The sources did not give details on how much the inflation forecast would be raised but said the RBI’S current view trailed the International Monetary Fund’s projection of 6.1 per cent for India.
In April, the RBI raised its inflation forecast for the current fiscal year to 5.7 per cent, 120 bps above its projection in February, while cutting its economic growth forecast to 7.2 per cent for FY23 from 7.8 per cent. The next meeting of the Monetary Policy Committee (MPC) is scheduled for June 6-8.
“The MPC did an off-cycle hike as it did not want to bunch off a big hike in just two meetings in June and August. They wanted to spread it (out),” one of the sources cited above said.
According to the sources, all reductions in the policy rate taken by the MPC since Covid-induced lockdowns were announced in 2020 would ultimately be withdrawn, but the timing has not been decided yet. “It may take one year, it may take two years, but ultimately these have to be withdrawn," said the source.
Earlier it was hoped that these cuts would be withdrawn in a laidback manner because the economy was not doing well. However, higher-than-expected inflation forced the RBI to hike the policy rate by 40 basis points outside the scheduled meeting. The sources said the MPC was not resorting to any extraordinary steps but was just reversing the measures announced to fight the decelerating economic growth during the pandemic.
They said all central banks were now going to drive their economy towards a decline in demand. “Whatever little demand there was will be killed and whatever little support inflation was getting will be killed,” said one of the sources.
They also attributed inflation to supply-side concerns. While supply disruptions have been there for quite some, the constraints have worsened. Now central banks are forced to act in some sense, they said.
The fear is that if inflation stays above the tolerance level for too long, it will enter into all the other things — rents, wages, transport costs, and you can't do anything about it. Typically what central banks do is to nip it in the bud, they said.