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With inflation ebbing into the target band, focus is likely to shift to helping economic growth in the new year, especially given the lagged impact of 2.25 per cent in rate hikes since May 2022, is likely to hamper GDP expansion.
The big story of 2022 happened on October 12, when official data showed that headline inflation was above the 6 per cent mark — the upper end of the tolerance band set for the central bank — for nine consecutive months. It triggered a letter from RBI to the government enumerating the reasons for the miss and also when it sees the price rise coming to the 4 per cent mark.
A bulk of the blame for persistent inflation was placed on the deteriorating global situation following the Russian invasion of Ukraine in late February, which led to a huge spike in the commodity prices, especially crude which India imports.
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The year started off with RBI Monetary Policy Committee (MPC) going for a prolonged status quo, till it delivered the surprise after an unscheduled meeting on May 4, by hiking the repo rate by 0.40 per cent.
Many blamed RBI for being behind the curve and acting late, but the central bank defended the actions by asserting that it was not behind the curve. They followed it with three consecutive hikes of 0.50 per cent and another of 0.35 per cent in December.
For some, reducing the quantum of the rate hike to 0.35 per cent means that RBI will not be reverting to the 0.50 per cent hikes even as the world is bracing for more central banks to hike rates by 0.75 per cent.
Headline inflation cooling off to 5.8 per cent in November has led more analysts to believe it will lead RBI to pause its rate hikes, and the divergent views coming out in the latest minutes of the six-member MPC only enhances the likelihood of a pause.
Helping the growth momentum in the economy will be a prime motive for a move like rate hike pause, as analysts already are pegging FY24 growth to slip to under 6 per cent.
Even RBI has revised down its GDP growth estimate to 6.8 per cent for FY23 though it is yet to come up with an estimate for FY24. Some analysts are even building-in the possibility of a rate cut as early as 2023 to help.
The currency depreciation aggravated the inflation situation as much of the commodities are imported. Unsurprisingly, it attracted a lot of RBI attention, with the overall reserves — compared to an umbrella to protect on a rainy day — declining by over USD 100 billion as RBI defended the rupee.
Still, the rupee touched a lifetime low of 83.29 against the dollar and the official line continued to be that market interventions are done to do away with volatilities. RBI also introduced a slew of new measures, including settling bilateral trade in rupee and incentivising diaspora deposits for banks.
Given that the Narendra Modi government has to face a general election in 2024, the pressure for addressing the growth demands are only bound to increase.
However, a lot will depend on the last full budget to be presented by the Finance Minister Nirmala Sitharaman next year. If it turns out to be expansionist and inflationary by connotation, then it is anyone’s guess on the way forward for the central bank.
The current credit growth at multi-year highs of over 17 per cent is something the central bank can take solace in as growth assumes greater significance. RBI Governor Shaktikanta Das has asserted that the rise in credit is not exorbitant, attributing the high number to low base and pent-up demand of the pandemic.
Das, who completed four years at the helm in December, has thrown away a big hint by a slight tweak made on RBI’s key focus area. Within less than a month of comparing RBI’s focus on inflation to that of Arjuna concentrating on the eye of the fish from the epic Mahabharata, Das expanded the focus area earlier this week to say that the central bank will be looking at growth and inflation.
Das, the career bureaucrat-turned-central banker, has broadly succeeded in ensuring warm relations between RBI and the central government.
However, there are some differences like Mint Road’s opposition to the private cryptocurrencies like Bitcoin, while the decision to hike was followed with voices of exasperation saying the government did not act timely on RBI requests for cut in taxes and cesses on oils to cool inflation.
On cryptocurrencies, the government moved to tax gains and also every transaction, a move which was celebrated by the industry as one giving it legitimacy. However, there is no final word yet on it, and Das delivered a fresh salvo in late December, warning that such speculative instruments will cause the next financial crisis.
The Central Bank Digital Currency (CBDC), which runs on the same technology, is a step closer to reality with pilots on both wholesale and retail CBDCs kicking-off during the year. Some questions, including ensuring anonymity, are yet unanswered.
Health of banks improved considerably in 2022, with expectations of dud loans declining to decadal lows, which can be seen as RBI’s actions over the last five-six years starting with the asset quality review, reaping its benefits.
Das also feels that the current high credit growth of over 17 per cent is driven by base effects and pent-up demand, but not exuberant which should bode well for the system.
However, when in doubt about a bank’s health, RBI did act like in the case of RBL Bank where the excessive focus on unsecured retail assets like credit cards, led the central bank to place an additional director on the board and refuse extension to the chief executive.
RBI acted against fintechs, preventing attempts to game the system like in case of prepaid payment instruments, where it disallowed the new-age players who are not banks from doing any credit or lending activities.
The central bank was also persistent in disciplining the tech sector, exhorting it frequently to follow the traffic rules and create products and services which do not affect the customers’ interest.
Das, who has captained the ship through choppy waters, has become a confident Governor.
During a chat last week at an event, Das was compared to Argentina’s football team captain Lionel Messi, who led his team to winning the World Cup this month. And pat came the reply that was also meant for critics who taunt his academic background where he studied history.
Das wondered if Messi is also a history major at university!.