High inflation and interest rates seem to have reached tipping point and will begin to pinch consumers — both in rural and urban areas. In the process, India’s GDP growth is likely to suffer though RBI has stuck to its earlier estimate of 7.4 per cent for the current fiscal. Most analysts, economists and brokerages believe that consumption will be hit leading to moderation in growth rate in the next few months notwithstanding that industry has been on a firm path to recovery on the back of consumption demand during the last six months. Generally, the cost of money will go up following two consecutive hikes in repo rate by 25 basis points each in a span of six weeks, a first since September 2013.
The Monetary Policy Committee (MPC) headed by RBI governor Urjit Patel has once again demonstrated that the central bank will give top priority to taming core and headline inflation. While hawks have termed RBI’s decision as a “pre-emptive strike” on the build up of inflationary pressure, the move will bring the central bank in direct confrontation with the NDA government in an election year. After the latest hike, repo rate at 6.5 per cent and reverse repo at 6.25 per cent will send out ominous signals for consumers. While the decision was not unanimous, RBI might not have had an alternative prescription to hiking rates. Consumer inflation at five per cent in June 2018 and core inflation crossing the six per cent mark seem to have moved the majority of members in MPC to vote in favour of the second consecutive repo rate hike. The uptick in inflation expectations by 20 basis points in the next three months was also evidently factored in.
What is perhaps debatable is RBI retaining a “neutral stance” in money policy instead of tagging its move to “tightening stance”. The steep increase in minimum support prices (MSP) allowing for 50 per cent margin on twenty odd kharif crops of 2018-19 seem to have also weighed in on RBI’s decision. The upside risk on food items seems to have pushed the RBI to take the call that it did. The uncertainty in crude prices owing to the slugfest within the OPEC, continued sanctions on Iran, trade wars involving the US, European Union, Russia and China have been cited by the central bank to support its decision. The expectation of 22 per cent increase in crude prices this financial year may fuel broad-based inflationary pressure. Though weightage of fuel in consumer price index is low, the second round of crude price hike seems to be headed for a broad-based impact on consumer inflation.
One view is that bank credit growth, which touched 12.4 per cent till July 28, may not taper off any time soon. Even in the worst-case scenario, the credit offtake growth was expected to be about 11-12 per cent this fiscal. If the demand for fresh funds continues, then the impact of RBI’s decision may be limited. From the consumer’s point of view, one would think twice before consuming.
In all likelihood, spending is expected to be staggered. What is, however, unnerving is that the upside risk to consumer inflation may persist over next 6-9 months. The protracted phase of high inflation and interest rates may not augur well from the growth perspective. Finance minister Piyush Goyal will have to weigh his options for maintaining growth momentum at least till next April when Lok Sabha elections are due.