With a 50 basis point (bps) hike in repo rates, the Reserve Bank of India’s Monetary Policy Committee in Friday’s meeting certainly surprised economists, analysts, and the street. The consensus was that given the recessionary fears world over the RBI would go in for a more moderate 25-35 bps rate hike.

The RBI has, however, retained its growth forecast at 7.2 per cent for 2022-23. The RBI’s more ‘hawkish’ stance is in sync with the US Fed’s move last week, which hiked rates by 75 bps.

The signal the RBI has sent with this quantum of a rate hike is very clear — the central bank still thinks that inflation is a risk to the economy though India’s inflation print, at a tad over 7 per cent, is still way below the US, the UK, and the Euro Zone (all over 9 per cent).

The RBI’s inflation forecast for this fiscal remains unchanged at 6.7 per cent which is closer to its upper band of 6 per cent (the central bank’s inflation target band is 2-6 per cent). Though the RBI sees inflation moderating in the coming months, it is still worried over the uncertainty prevailing in the world economy.

The RBI’s 7.2 per cent growth projection is in sync with the IMF’s India’s growth forecast of 7.4 per cent for 2022-23, which is 0.8 percentage points down from its April forecast.

IMF’s bleak projections

The IMF in its recent World Economic Outlook cites the ongoing war in Ukraine, inflationary pressures and rate hikes for its downward growth projections. This gloomy prediction comes in the backdrop of the rupee touching new lows and breaching the 80-mark in recent days.

The IMF has cut China’s growth forecast to 3.3 per cent from 4.6 per cent and said that world growth is set to plummet from 6.1 per cent in 2021 to 3.6 per cent in 2022 and 2023. However, the silver lining for India is that it still remains the fastest growing major economy for 2022-23 and 2023-24.

The IMF report said that the inflationary pressures worldwide had impacted the living conditions of people due to which central banks are resorting rate hikes and monetary tightening. These policies, the IMF report says, will have economic costs, but they cannot be put off any longer.

The US Fed Reserve in its meeting on last Wednesday as expected effected another rate hike of 75 bps.

The China factor

China’s growth forecast at 3.3 per cent is its lowest in four decades. Given its size and role in global supply chains, a slowing China can create more problems for the world economy than the Fed Reserve’s rate hike.

China’s Covid lockdowns have been severe and its zero Covid policy has extracted a huge price from the world economy.

India in a better place

But compared to the rest of the emerging economies, India seems to be better placed. The rupee’s fall has not been as severe as that of the Taiwan dollar and Thai Baht. So currency depreciation is something that a lot of countries are grappling with, thanks to the sudden hardening of the dollar.

But India’s forex reserves position is comfortable and so is its external debt position. The RBI has also taken a slew of measures to arrest the fall of the rupee in recent weeks. So, though the IMF’s outlook may seem gloomy, from India’s and other emerging markets’ perspective, there is no reason to despair for now.

As some economists, including Surjit Bhalla and Soumya Kanti Ghosh, have said, the economy today despite the global uncertainties is better placed than it was in 2013, where inflation and current account deficit were far worse and India was clubbed along with Turkey, Brazil, Indonesia and South Africa as the “fragile five” by Morgan Stanley.

Ghosh, in a recent column, says that bank credit is rising and Indian banks are in a far healthier position today compared to a few years ago when they were grappling with a crippling NPA problem.

The Fed’s positive cues

Some good news on the global scenario came from an unexpected quarter — the US Fed. Though the Fed in last week’s meeting raised rates once again, it was lower than anticipated, and it also made some positive noises that warmed the hearts of stock and currency markets world over.

Fed Chairman Jerome Powell stated after the meeting that he was aware of the recessionary pressures building up in the US economy and going ahead, further rate hikes would be “data dependent.”

This sliver of hope was enough to send the markets soaring including India’s BSE and NSE. The Indian markets also outperformed other Asian markets in recent days.

The US markets, too, took a positive view and read an “accommodative message” from Powell’s comments on Fed’s keenness to roll up its sleeves at the first sign of recession. This shows how desperate markets are for some good news in these uncertain times.

A gung-ho FM

Despite Finance Minister Nirmala Sitharaman’s assertion in Parliament on Tuesday that India was at no risk of slipping into recession or stagflation, and the macroeconomic fundamentals being strong, the government for the time being is viewing inflation as a bigger near term threat to the economy.

With due apologies to RBI’s institutional autonomy, its 50 bps rate hike is a clear signal of how the government is viewing the current economic scenario.