Another RBI Rate Hike Possible in December, Warns Crisil Economist
Crisil Chief Economist Dharmakirti Joshi warns of a potential RBI repo rate hike in December due to rising inflation risks and supply-side pressures.
The Reserve Bank of India (RBI) may be forced to tighten its monetary policy once again later this year. According to Dharmakirti Joshi, Chief Economist at Crisil, there is a strong possibility of another repo rate hike during the December monetary policy meeting as inflation risks continue to loom large over the economy.
Following the recent decision by the RBI's Monetary Policy Committee to raise the policy repo rate by 25 basis points to 5.50 per cent, market experts are closely watching the trajectory of interest rates. Joshi noted that while a rate cut is currently off the table, the central bank faces a choice between pausing or hiking rates again in December.
Rising Inflationary Pressures
The primary driver behind the potential hike is the worsening inflation outlook. Joshi highlighted several factors that are putting immense pressure on the supply side of the economy, making it difficult for inflation to subside.
Key contributors to these inflationary risks include:
- Geopolitical Tensions: The intensification of conflicts in West Asia has added significant uncertainty to global markets.
- Monsoon Risks: Realised monsoon-related risks and the potential for El Niño to impact crop yields.
- Higher Input Costs: Rising costs for producers which, due to strong domestic demand, are being passed on to end consumers.
"When the demand in the system remains strong, then input costs get passed on to the end consumers and the inflation becomes generalised," Joshi explained, noting that the risk regarding food prices remains tilted to the upside.
Economic Growth Outlook and Buffers
Despite the inflationary concerns, India's economic growth remains resilient. Crisil expects India's GDP to grow at approximately 7 per cent in the current fiscal year, aligning closely with the RBI's revised projection of 7.1 per cent.
However, the pace of this growth might vary throughout the year. Joshi anticipates a robust performance in the first half of the year, with a potential moderation in the second half as the effects of higher prices, geopolitical instability, and monsoon volatility become more apparent.
Resilience in the Rural Economy
While a severe monsoon shock could dampen consumption, Joshi pointed out that the rural economy is better equipped to handle such disruptions than in previous decades. He cited several "buffers" that provide a safety net:
- Diversified Agriculture: The rise of animal husbandry, poultry, and fisheries provides a cushion against rainfall-related shocks.
- Improved Irrigation: Irrigation coverage has seen a massive jump, reaching nearly 59% compared to just 49% a decade ago.
While these factors offer protection, the economist cautioned that if a monsoon shock proves too significant, it could still have a moderating impact on overall consumption across the country.