Caught in the Middle

The deceleration in consumer prices to within the upper tolerance threshold of 6% in the last two months of 2022 came as a major relief. Consumer prices had persistently overshot the threshold in the first 10 months of 2022 forcing the Monetary Policy Committee (MPC) of the Reserve Bank of India to hike up repo rates six times since May 2022. While the first four hikes till September 2022 pushed up policy rates from 40 to 50 basis points, each of the last two interventions in December 2022 and February 2023 were more moderate, with the rate hikes tapering down to 35 and 25 basis points, respectively. Overall, the repo rate had been pushed up by 250 basis points from 4% in May 2022 to 6.5% in February 2023.

One reason why the policy rate hikes had been tapered off is the sustained fear of a negative impact on growth and the increasing resistance to the withdrawal of accommodative stance in the MPC. A subtle positive reassessment of the macroeconomic scenario also helped. At its last meeting in early February, the MPC noted that the capacity utilisation in manufacturing had slowly moved up above its long-term average. It also pointed to the positive trends in the purchasing manager’s indices of manufacturing and services, the improving agriculture prospects, and strong credit offtake in the economy to buttress this view.