The global slowdown and its impact on the Indian economy will be a key consideration for India's monetary policy, according to Shashanka Bhide, one of the three external members on the Reserve Bank of India's Monetary Policy Committee.
"The extent and duration of the global slowdown and their implications for the domestic economy would clearly be an important consideration for policy," Bhide told Moneycontrol in an interview.
Policies will need to respond to achieve a stable macroeconomic environment, Bhide said, adding that it is difficult to "completely ignore" growth trends even as the MPC focused on bringing inflation down to the target.
Bhide's comments come amid rising concerns about the spillover of the global slowdown on India's growth. In an attempt to bring down multi-decade-high inflation, major central banks increased interest rates rapidly in 2022. The US Federal Reserve has been at the forefront of the tightening, raising its key rate by more than 400 basis points this year.
One basis point is one-hundredth of a percentage point.
Growth pangs
The rapid tightening of monetary policy globally has already begun to hurt demand for India's goods. In October, merchandise exports were down 17 percent, with November seeing a marginal rise of 0.6 percent. A deceleration in import growth to 5.4 percent in November has also sparked concerns about weakening domestic demand.
In fact, economists think growth may weaken so much that the MPC may start cutting interest rates in the second half of 2023.
According to Bhide, numerous indicators suggest growth momentum has been sustained in October and November, although there are sectors where growth has been weak.
"On balance, growth would have been more robust with a positive external scenario," Bhide said.
The RBI has forecast a GDP growth rate of 6.8 percent for 2022-23, which it sees moderating to 6.5 percent in 2023-24. For Bhide, a growth rate of 6.5 percent or above "would sustain high levels of employment".
Sustainable fall in inflation
With growth facing headwinds from overseas, Bhide said it was crucial for inflation to be lowered in a sustainable way.
"A course that brings the inflation rate to the target in a sustained way with minimal disruptions to growth momentum is clearly a preferred policy rather than fluctuations," Bhide said.
Inflation has dropped dramatically in recent months, with Consumer Price Index (CPI) inflation falling more than expected to an 11-month low of 5.88 percent in November. The 153-basis-point fall from September's 7.41 percent means headline retail inflation has retreated within the RBI's mandated target range of 2-6 percent for the first time in 2022.
Bhide, though, is seemingly unconvinced by the fall in inflation.
"A large part of the decline in November headline number is driven by some of the food commodities. We need to see a sustained pattern or indications of moderation in core inflation," he said.
Like the headline number, the November food inflation print was also the lowest in 11 months, down at 4.67 percent from 7.01 percent in October.
In its statement earlier this month, the MPC emphasised the need to break the persistence of core inflation, which has stayed around the 6-percent mark for more than a year. According to Bhide, core inflation should decline significantly as international commodity prices begin to moderate and pressure on India's supply chains ease.
"Further, core inflation has a significant weightage in the headline inflation as well. Monetary policy actions, particularly affecting demand, will have a greater impact on core inflation if inflation in the other components eases," he added.
The MPC has raised the repo rate by 225 basis points in 2022 to 6.25 percent. The cumulative impact of these rate hikes, Bhide said, will only be felt in 2023, given the lag with which monetary policy takes effect.
"At this stage, consistent moderation in the momentum of inflation, particularly core, is one of the key data patterns I would look for," Bhide said.