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Reserve Bank of India (RBI) Governor Shaktikanta Das and deputy governor Michael Patra attend a news conference after a monetary policy review in Mumbai, India, April 6, 2023.
Image: Francis Mascarenhas / Reuters
In a surprise move, all six members of the Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) decided to keep the key lending rate unchanged at 6.5 percent, and five out of six members voted for a continued focus on withdrawal of accommodation. Intriguingly, the central bank bucked consensus as it marginally trimmed its inflation forecast and raised its growth outlook—by 0.1 percent to 5.2 percent and 6.5 percent respectively—even as headline inflation remains elevated beyond 6 percent in a highly volatile and uncertain global economy.
But this is a ‘hawkish’ pause as the RBI steers monetary policy for a “non-disruptive normalisation” and says it is “unwaveringly focussed on inflation”.
“The monetary policy actions taken since May 2022 are still working through the system. Accordingly, the MPC decided to keep the policy rate unchanged to assess the progress made so far, while closely monitoring the evolving inflation outlook. The MPC will not hesitate to take further action as may be required in its future meetings,” RBI Governor Shaktikanta Das asserted as he announced the first bi-monthly credit policy of the current fiscal year.
In February, retail inflation stood at 6.44 percent, and is likely to remain sticky. The recent development of a possible cut in production of crude oil by OPEC countries and Russia is a looming concern for price stability, as is the adverse impact of extreme weather conditions on food prices and the upcoming state elections. The RBI has factored average crude oil price at $85 per barrel and a normal monsoon for its lower projection of inflation at 5.2 percent in FY24.
“The messaging is subtle that the MPC expects the economy to fare well on both [inflation and growth] counts this year. This comes at a time when the World Bank has just lowered its GDP forecast for India. The RBI does believe that both the domestic and external sectors are doing well to warrant such optimism,” says Madan Sabnavis, chief economist, Bank of Baroda.
Although the MPC decided to hold the benchmark rate, Governor Das signalled that the rate hike cycle hasn’t necessarily peaked, and the possibility of a rate hike cannot be ruled out in the coming months. He reinforced, “Let me emphasise that the decision to pause on the repo rate is for this meeting only… our job is not yet finished, and the war against inflation has to continue until we see a durable decline in inflation closer to the target.”
In fact, not much has improved on the global and domestic front since the February meeting. Headline inflation inched up and was higher-than-expected. The world economy is witnessing new headwinds as the banking sector crisis unfolds in key western markets and fears of contagion threaten financial stability even as stubborn inflation persists.
“On the whole, the policy is cautious and subtle in messaging, and while it has provided comfort for sure on pausing the repo rate hike, it has indicated that going forward, everything will be data-driven,” says Sabnavis.
In its February meeting, RBI members had a very cautious outlook and they stated, according to the minutes of the meeting, that the stance of the monetary policy will need to remain disinflationary till inflation returns to target. Thus, it is surprising that they voted to hold the repo rate this month.
Aditi Nayar, ICRA’s chief economist, says, "Financial stability concerns appear to have pre-empted a pause as the MPC assesses the impact of its cumulative 250 basis points of rate hikes. If inflation does not fall in line with the MPC's assessment for Q1FY24, another hike could be in the offing, especially if the financial stability situation stabilises."
The status-quo policy brought cheer for debt and equity markets. As Governor Das announced the policy contours, the 10Y bond yield fell by 1.18 percent to 7.187 and the S&P BSE Sensex rose by over 135 points to over 59,825. “The MPC seems to have been reasonable considering the fact that India never had near-zero rates and its economic growth seems well on its path. However, oil-related shocks and global recessions need to be monitored closely to make sure that the impact on India is contained, if not insulated,” says Abizer Diwanji, head-financial services, EY India.