Economy holding up amid policy tightening

GDP data for Q2 (Q1 of FY22/23) due next week should show that the economy grew at a robust pace last quarter despite the onset of monetary policy tightening. And more timely indicators suggest that the economy has held up well so far in Q3 too. The manufacturing and services PMIs remained high by pre-pandemic standards in July, while imports excluding gold and oil (a proxy for domestic demand) continue to rise. Policymakers also seem comfortable with the strength of the economy. The minutes to the RBI’s August policy meeting noted that “domestic activity remains resilient”. All of this should give the MPC confidence to press ahead with another 50bp hike to the repo rate in its September meeting to contain price pressures, before switching to smaller rate hikes thereafter.