RBI on a hawkish pause; aims to achieve 4 percent inflation
The Monetary Policy Committee kept the repo rate unchanged at 6.5 percent, but RBI Governor Shaktikanta Das cautioned that inflation concerns in the second half of the year need to be watched and addressed at an appropriate time
India’s central bank followed the script. No surprises and no shocks either. As widely expected, it delivered a status quo credit policy. The six-member rate-setting panel unanimously voted to hold the benchmark repo rate at 6.5 percent and five members voted to continue with the policy stance and focus on withdrawal of accommodation. The Reserve Bank of India (RBI) marginally lowered its inflation forecast to 5.1 percent from 5.2 percent, but kept its growth estimate unchanged at 6.5 percent for FY24.
In fact, RBI Governor Shaktikanta Das reiterated, “Let me re-emphasise that headline inflation still remains above the target and being within the tolerance band is not enough. Our goal is to achieve the target of 4 percent, going forward.” This is an important policy cue for the rate trajectory in the coming months. “While risks to near-term inflation have moderated somewhat, pressure remains during the second half of the year which needs to be watched and addressed at an appropriate time,” he said.
“Close and continued vigil on the evolving inflation outlook is absolutely necessary, especially as the monsoon outlook and the impact of El Nino remain uncertain. Taking all of these factors into account, the Monetary Policy Committee decided to remain focussed on withdrawal of accommodation to ensure that inflation progressively aligns with the target while supporting growth,” Das added.
The central bank noted that urban spending remains robust and rural demand is improving, though unevenly. Das pointed out that fiscal consolidation is ongoing and domestic macroeconomic fundamentals are strengthening: Economic activity is exhibiting resilience; inflation has moderated; the current account deficit has narrowed; and foreign exchange reserves are comfortable.
Also read: India's Goldilocks economy: Will the RBI change its policy stance?
Markets were largely unaffected by the tone of the policy. The ten-year bond yield inched up by 0.46 percent to 7.01 percent and the S&P BSE Sensex was flattish. Aurodeep Nandi, India Economist and vice president at Nomura called it a ‘Goldilocks’ pause for the RBI.
“In the run-up to the policy meeting, the economy finds itself in a fortuitous ‘Goldilocks’ macro situation, with better-than-expected Q4FY23 GDP growth and inflation tracking closer to the RBI’s midpoint target of 4 percent. Hence, the macro conditions remained conducive for the RBI to pause and reinforce its FY24 forecasts for GDP growth at 6.5 percent and a slightly lowered CPI inflation at 5.1 percent. Governor Das remained bullish on growth and hawkish on inflation, reiterating the RBI’s inflation target of 4 percent. Our macro view though remains that both growth and inflation are likely to undershoot the RBI’s projections in FY24,” he says.
Also read: Monsoon pivotal for government to manage inflation & growth in pre-election year
Lakshmi Iyer, CEO-investment and strategy, Kotak Investment Advisors, says the policy decision to remain status quo was in line with street expectations. “Given that global macro headwinds are still visible, the members did not feel it appropriate to change their stance. It looks like the market wait for rate cuts just got longer, as we saw Canada policy makers announce a surprise rate hike. Key incoming data dependency will continue to be the order of the day. Policymaker guard rails remain. Bonds may continue their sideways movement and continue to track global bond yields, specifically US treasuries,” she adds.
Last Updated :
June 08, 23 04:33:29 PM IST