India's monetary policy could reverse in 2023 as weakness in the global economy may dampen domestic growth, the three external members of the Reserve Bank of India's Monetary Policy Committee have hinted.
In a series of interviews to Moneycontrol following the release of the minutes of the December 5-7 meeting of the MPC, the rate-setters made comments which suggested monetary tightening could give way to rate cuts.
"I expect that whatever downturn is there in the global economy will be short-lived because having been very quick to raise rates to bring inflation down, I think global central banks will be equally proactive in bringing them down if required," Jayanth Varma said.
"So there is a risk global central banks will overshoot the monetary tightening; I fear that we will overshoot in India as well. But I think in both cases the correction will be very fast," he added.
Major central banks across the world have rapidly raised interest rates this year to tackle multi-decade high inflation. The US Federal Reserve, for instance, has increased its federal funds rate target range from 0-0.25 percent prior to its meeting in mid-March to 4.25-4.5 percent earlier this month.
The MPC has increased the repo rate by 225 basis points in 2022 to 6.25 percent.
One basis point is a hundredth of a percentage point.
Global slowdown impact
According to Shashanka Bhide, the extent and duration of the global slowdown and the implications for the Indian economy would "clearly be an important consideration for policy".
"Weak growth with a higher inflation rate would be clearly a poor outcome for the economy," Bhide said earlier this week.
"Policies will need to respond to achieve a stable macroeconomic environment," he added.
The global slowdown is already being reflected in the demand for India's goods, with merchandise exports down 17 percent in October followed by a marginal 0.6 percent rise in November. In her statement in the minutes of the December 5-7 meeting, Ashima Goyal – the third external member on the MPC – had noted that deceleration in import growth suggested domestic demand is also shrinking.
In an interview to Moneycontrol, Goyal said monetary policy will be "data-based". While she voted in favour of a 35-basis-point rate hike on December 7, the minutes of the meeting revealed Goyal would have preferred an increase of 25 basis points.
"The minutes give different perspectives so that analysts and markets can form their own judgement. Communication tends to be more challenging, and views more varied, as a policy pivot approaches," she said.
Rate cuts beckon
To be sure, it would not be a shock if the MPC makes a U-turn and cuts the repo rate next year, with Consumer Price Index (CPI) inflation also having returned to the tolerance band of 2-6 percent in November after spending 10 months above the upper bound.
"Under our base case scenario, we are forecasting the repo rate to reduce to 5.5 percent by April-June of 2024, pencilling in a cumulative 75-basis-point reduction (25 basis points cut in each of December 2023, February 2024, and April 2024 meetings) from a peak of 6.25 percent, likely achieved in December 2022," Kaushik Das, Deutsche Bank's chief economist for India, said in a note on December 12.
Others are more pessimistic about India's growth outlook, with Nomura predicting 75 basis points worth of rate cuts in 2023 itself, with the first expected in August.
"Beyond February, we expect monetary policy to be on hold. However, if growth significantly disappoints (as we expect), inflation moves back into the target range and the Fed pauses, we would expect the policy focus to shift entirely towards supporting growth," Nomura economists said last week.