India’s central bank is likely to keep interest rates unchanged at the current record low levels until October this year, says Anitha Rangan, economist at financial services provider Equirus.
Speaking to capital.com, she said that the Reserve Bank of India (RBI) would gradually change its present accommodative stance as inflation hardens.
At its last monetary policy committee meeting held earlier this month, the bank had reinforced its support to accelerate economic growth by holding the benchmark repurchase rate at 4% even after inflationary concerns.
‘This time it’s different’
Anitha Rangan, who has a 16-year strong service in the industry, says that the pandemic’s effect on the global economy was much different than ever with supply-side shocks on inflation being more persistent than before.
Average inflation in the US – a proxy for the global economy – was about 4.5% for 2021 with the November print at 6.8%. In the growth versus inflation balance, the latter took precedence in a much aggressive way now, said Rangan.
“Historically, growth had always been an overarching metric in any rate change cycles. While the US Fed and India’s RBI have adopted an explicit inflation targeting framework in the previous decade, moderating inflation has not been at the expense of growth,” she noted.
“This time around it appears that inflation seems to have taken an upper hand,” said Rangan.
Uncomfortable inflation trajectory
At present, the global economic situation was softer, even as the tailwinds of the pandemic continue to linger with the emergence of the new virus variants. And this would be the first time since the adoption of an inflation-targeting framework in 2016 that the central bank will be put to test, Rangan added.
According to her, it was a juncture of an uncomfortable inflation trajectory when growth is weak. India was just a few sequences behind the US trajectory where growth was yet to firm up and retail inflation had not stepped into the discomfort zone.
“Economy is still not out of the woods. While inflation management will be crucial for RBI, India’s inflation will not be a 3-4% away from its target like its global counterparts requiring a similar action,” Rangan said.
RBI maintained its gross domestic product forecast of GDP for the year to March 2022 at 9.5% though it revised down its growth estimate for the October-December quarter to 6.6% from 6.8% and the quarter thereafter to 6% from 6.1%.
It revised upward the projection for the current quarter to 5% from an earlier estimate of 4.5% and for the quarter later to 5.7% from 5.8%.
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