ExplainSpeaking | Why RBI is likely to cut GDP growth forecast and raise interest rates

Express Explained

The RBI cannot allow inflation to soar above it and the government cannot allow the GDP growth rate to fall below it. In photo, sellers line up at a vegetable market. (📸 Narendra Vaskar)   Dear Readers,   This week, between September 28th and 30th, the RBI’s Monetary Policy Committee (MPC) will meet again and recalibrate India’s monetary policy stance.    Like always, the two key things to watch out for will be :   1) What happens to interest rates?   2) What happens to GDP growth projections?   Why interest rates (read your EMIs) are likely to go up further    There are two broad reasons why RBI will hike interest rates this week.   One   By law, the RBI is required to prioritise maintaining price stability. Simply put, it is legally required to target a retail inflation rate of 4%. It has been given a leeway of two percentage points on either side. In other words, retail inflation can deviate from 4% but not breach the 2% to 6% comfort zone.    The RBI is already behind the curve. Since the start of 2022, inflation has been above the 6% mark in each of the three quarters. What’s more, even by RBI’s projections, retail inflation is likely to be 6.7% for the financial year ending in March 2023.    This was one of the primary reasons why the RBI started hiking interest rates in May this year. Read this piece to know more.  Since May, RBI has raised interest rates by 140 basis points; 100 basis points make a full percentage point. As such, the repo rate (or the rate at which RBI loans money to the banking system) has gone up from 4% to 5.40%.    Yet, inflation remains stubborn. After climbing to 7.8% in April — the highest since Prime Minister Narendra Modi took office in 2014 — it simmered down a bit but never fell below 6.7%. In August, it climbed back to 7% and there is a very good chance that it may clock an even higher number in September. This is the first reason why RBI will continue to raise interest rates.   Two   The second trigger to raise interest rates comes from the actions of the US central bank. The US has been facing very high inflation — it had gone above 9% in June — even though the Federal Reserve targets an inflation rate of just 2%. The Fed has been aggressively raising interest rates in a bid to cool down inflation. Last week, it raised the interest rates by 75 basis points — the third successive hike of this magnitude this year.    The Fed hopes that such sharp increases in the interest rate will persuade Americans to cut down on credit-financed spending, thus cooling down the spiralling price rise.    While these rate hikes by the Fed are pushing the US economy towards a possible recession, they are also creating havoc in emerging market economies such as India.   Here’s how: When the US had low interest rates, global investors could borrow money at almost zero interest rate and invest in emerging economies such as India. When the US raises interest rates, that incentive changes direction; money tends to get pulled out of economies such as India. When that happens, the rupee's exchange rate vis-a-vis the US dollar starts to plummet.    It is also important to remember here that regardless of the Fed’s decision, the rupee's exchange rate faces challenges because India has a rising trade deficit (that is, the excess of imports over exports). A weaker rupee, in turns, implies higher imported inflation because all imports become costlier.   To counter all these reversals, the RBI is forced to raise interest rates.    It is expected that the Fed will likely raise the US interest rates by another 100 basis points (that is, one full percentage point) in the coming months.    Expect the RBI to raise 50 basis points this week, and possibly another 50 basis points in due course. These increases will, in turn, make all loans (be it for a new car or new house this Diwali) costlier.   Why GDP growth estimates are likely to be dialled down   While RBI is getting forced into raising interest rates to contain inflation, the growing worry in the government is about what this will do to India’s economic growth recovery. Read this piece to understand the divergence between the RBI and the government on monetary policy.   Of course, someone can point out that RBI has not altered the GDP growth forecast — 7.2%, to be precise — for the current financial year since April, when this financial year started. But that is where the problem lies.   When RBI projected a GDP growth forecast of 7.2% for 2022-23 in April, its inflation forecast for the year was 4.5%. Since then, the inflation forecast has gone up from 4.5% to 6.7%. In response, RBI has already raised interest rates by 1.4% and there is a very good chance that they will likely go up by another one percentage point in the coming months.    Can the GDP forecast remain the same when both inflation and interest rates have gone up by over two percentage points? Most unlikely.    As explained in the past, higher interest rates tend to drag down economic activity in an economy. Even the government knows this, and that's why it is worried about the economic growth rate falling to anything less than 6% in the lead up to the next general elections in 2024.   Upshot: Six per cent is emerging as the key macro number to watch out for in the lead up to the next general elections in 2024. The RBI cannot allow inflation to soar above it and the government cannot allow the GDP growth rate to fall below it.    What do you think is the bigger concern for Indian policymakers: High inflation or low growth rate (and associated high unemployment)? Share you views and queries at udit.misra@expressindia.com     Till then, stay safe. Udit    If you received this newsletter as a forward, you can subscribe to it, here.   Do read our other Explained articles, here  | To subscribe to our other newsletters, click here

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The Muslim political predicament

In Our Opinion

Dear Reader    Two events made it to the headlines this week. One, a group of five intellectuals from the Muslim community had met RSS sarsanghachalak Mohan Bhagwat in Delhi a few days ago and held a nearly two-hour long discussion with him on Hindu-Muslim relations. Two, central agencies, among them the National Investigation Agency (NIA) and the Enforcement Directorate (ED), raided the offices of Popular Front of India (PFI) and arrested the leadership of the Islamist outfit. These unrelated developments, in some ways, point to a political predicament that the nation's largest minority community faces today.    In the case of the action against PFI, the NIA issued a statement which said it has "evidence that the PFI leaders and cadres were involved in funding of terrorism and terrorist activities, organising training camps for providing armed training and radicalising people to join banned organisations". The Express editorial (The PFI challenge, September 24) pointed out that PFI workers have been arrested in the past for carrying out political murders as well as attacking people perceived to have insulted Islam. The outfit's most infamous action has been the attack on T J Joseph, a college teacher in Kerala, for allegedly defaming the Prophet - a group of PFI activists chopped off a hand of Joseph. The perception about the PFI as a political outfit that sees violence as a tool to push its polarising political agenda is not without basis. However, as the editorial said, "it would be myopic to view the PFI challenge purely in terms of national security; it also poses a political challenge that needs to be framed in terms beyond arrests and FIRs".   The PFI is the product of specific national and international contexts. Islamist politics received a fillip in the 1980s after the success of the Iranian revolution. The demise of Soviet Union and the decline of Communism as an ideological counter to Western capitalist order produced a vacuum that allowed the Islamist political stream to offer itself as an alternative to political liberalism and modernity identified with the US and European nation states. Its immediate impact was in West Asia and Afghanistan, but it resonated in India also. The demolition of Babri Masjid in 1992 and the emergence of Hindutva politics helped Islamist outfits to find a foothold among a section of the community. In the later years, when the country was rocked by numerous terrorist attacks, the State came down heavily on Muslim youth suspected to be associated with Islamist outfits as many of these attacks attributed to these groups. The vicious cycle produced its own politics of hate, anger and resentment. The political mainstream, including Muslim parties, failed to address this crisis - most of them fell silent as questions about human rights and due process were pushed to the background as fear, anger and insecurity produced by the series of bomb blasts and terrorist attacks vitiated the social environment. The rise of Hindu majoritarianism and the marginalisation of minorities in social and public life have further complicated the picture. The editorial says that organisations such as the PFI "taps into wells of resentment to earn political legitimacy even if that means using violence and defying the rule of law". This political challenge can't be addressed merely by demonising the PFI and other such groups.    In an exclusive article to the Express, former Chief Election Commissioner S Y Quraishi, who was part of the delegation that held talks with the RSS chief Mohan Bhagat, has explained what prompted this team of intellectuals/public personalities to reach out to the sarsanghchalak. In the article (Why we met RSS chief Mohan Bhagwat), now available online, Quraishi writes: "I would like to clarify that this was entirely an initiative of the five of us, a motley group of friends with common concerns about the insecurity of the Muslim community and a belief in the process of dialogue. Since the news broke, we have received innumerable messages of support from members of the Muslim community, and even non-Muslims, echoing our feeling that dialogue is the only way forward."    He writes: "What prompted us to seek this meeting? Well, our pressing concern is about the way things are going, especially the insecurity being increasingly felt by the Muslim community in the wake of recurring incidents of lynching of innocents, calls by Hindutva hotheads for genocide and the marginalisation of the community in almost every sphere..." Quraishi adds that Bhagwat listened carefully and shared with them the concerns that he thought vitiated Hindu-Muslim relations in the country, among them cow slaughter and terms such as "kafir" used in a derogatory manner. The RSS chief conveyed that his organisation had no intention to tamper with the Constitution or limit the rights available to Muslims as Indian citizens. On their part, Quraishi and others flagged the concerns of the Muslim community. Bhagwat agreed to the suggestion that the dialogue must continue and named four persons from the Sangh to take it forward.   Quraishi mentions that he and friends have been criticised for reaching out to the RSS chief. This is a predicament of those liberal Muslims, who seek to undertake the difficult task of walking the tightrope between a majoritarian politics and extremist groups that draw legitimacy from narrow and exclusivist visions of faith. It poses an existential challenge to even parties such as the Kerala Muslim League, which have been part of the electoral mainstream and reasonably successful in protecting the political, social and economic space of Muslims. The fear of being branded as Muslim appeasers and its potential debilitating impact in elections has forced many opposition parties, including the Congress, to be muted on these issues. The result is the spectre of a political future that oscillates between social and political invisibilisation and criminalisation of Muslims. The presence of groups such as the PFI signifies the failure of secular politics in upholding rights-centric agendas as much as it points to the fatal allure of faith-centric identity politics. The anti-CAA protests had produced a remarkable positive politics centred on a Constitutional vision of rights and the Subcontinent's syncretic cultural traditions. The spread of the pandemic diminished the political possibilities of those mobilisations. The responsibility for working out an honourable solution to this crisis of politics does not lie solely with Muslim public intellectuals.    During the week, we featured fine articles on subjects such as the Leicester violence (Pratap Bhanu Mehta, Exporting division, September 22), Gautam Adani's entry into the global rich list (Nirupama Subramanian, Adani's global footprint, September 24), the Bengaluru floods (Janaki Nair, Reimagining Bengaluru, September 19), the debate on providing reservations under SC category for Dalit Christians and Muslims (Satish Deshpande, A question of intent, September 21), impact of the Varanasi court order on Gyanvapi mosque (Hilal Ahmed, At Gyanvapi, a new politics, September 21), the funeral of Elizabeth II and our fascination with rituals (Shreekant Sambrani, For the love of pomp, September 21), on CBI, ED reforms (Vineet Narain, Freeing the caged parrot, September 23), the music of the late Carnatic maestro T V Sankaranarayanan (T M Krishna, My hero, my muse, September 24) among others. Please look them up if you missed them on their day of publication.   That's all for this week.   Thank You,  Amrith   Amrith Lal is Deputy Editor with the Opinion team

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