The Monetary Policy Committee (MPC) delivered to market expectations, and bond prices declined while the rupee gained on the dollar. RBI held on to its growth and inflation forecasts for 2022-23, but realigned quarterly estimates to adjust for flattening commodity prices during the current quarter, while raising them for the next on moderating yet persistently high core inflation. This assessment could provide an indication of subsequent rate actions and a terminal rate if inflation stays on course.
RBI sees a broadening of economic activity in high-frequency indicators and expects the investment cycle to turn with manufacturing capacity utilisation levels above the long-term average. Bank credit growth has almost tripled in the preceding 12 months and companies have the capacity to absorb loans. Demand for contact-intensive services is strengthening.
Rural demand is seen reviving with an improvement in the progress of the monsoon. Exports have come off at a scorching pace, while imports, excluding oil and gold, indicate robust domestic demand. Services exports are still strong despite a slowdown in major markets. Shaktikanta Das sees India as an ‘island of stability’ in an ‘ocean of high turbulence’.
Some of that could wash ashore. Pass-through of input costs to product prices and wages might strengthen with an improvement in consumption demand and revival of private investment. According to Das, ‘the inflation trajectory is now poised at a decisive point’.
There are signs of domestic inflationary pressures softening while external factors remain malign. The global financial markets have synchronised capital flows to advanced economies while trade earnings are being fragmented by geopolitics. This adds to the pressure on suppressing currency volatility.