RBI takes it one meeting at a time
3 min read . Updated: 07 Apr 2023, 01:05 AM IST
PremiumThe central bank kept the benchmark repo rate unchanged at 6.50%.As per RBI, the two guiding factors for the pause were the need to assess the impact of monetary tightening delivered so far and the recent global financial stability concerns.
The Reserve Bank of India (RBI) surprised the markets with a sudden pause in interest rate hikes. After six consecutive hikes over the last one year, the central bank kept the benchmark repo rate unchanged at 6.50%. In contrast, most economists were expecting a 25 basis points increase in the repo rate. According to the RBI, the two guiding factors for the pause were the need to assess the impact of monetary tightening delivered so far and the recent global financial stability concerns.
That said, another surprise in the policy has been the unanimity in the rate decision, with all the six Monetary Policy Committee (MPC) members voting for a pause. This compares with four members backing a hike in the February meeting.
But it’s worth noting that despite a status quo on rates, RBI’s focus on combating inflation remains. In its statement, the central bank acknowledged that inflation continues to remain above target. Further, it said that the disinflation process will likely be “gradual and protracted." It has maintained the “withdrawal of accommodation" stance. The governor’s comments such as “RBI’s job is not yet finished," underscore the central bank’s inflation focus.
And why not? Even as the RBI has paused rates, inflation continues to remain elevated and above the upper tolerance band of the central bank’s 2-6% target. RBI’s projections peg average FY24 inflation measured via the consumer price index at 5.2% year-on-year (y-o-y), a tad lower than 5.3% expected in February. However, this is still closer to the upper end of RBI’s comfort zone. To be sure, ensuring a steady and sustained disinflation process hereon is a tall order given the upside risks to inflation.
Factors such as a record rabi harvest and easing global commodity prices provide some comfort but heatwaves, recent unseasonal rains and seasonal factors may limit a meaningful drop in food inflation. The possibility of El Niño in 2023 is a risk. Moreover, even as the RBI has assumed a moderation in price of the Indian crude oil basket to $85 per barrel in FY24 from $95 last year, the outlook is uncertain and its impact on fuel inflation is unavoidable.
The other key risk emanates from the sticky core inflation trajectory, which has hardly shown signs of moderation despite the cumulative 250 basis points hike delivered since May. Finally, heightened global financial market volatility and consequent implications on commodity prices and currencies continue to linger. This can have a bearing on imported inflation.
The RBI governor has reiterated in multiple ways that the status quo is for just the April meeting and markets should take note of this. With heightened global uncertainty, the central bank has likely focused on the current dynamics. “We believe the fear that “speed can kill" has led to dovish turn from a number of central banks in both developed markets and emerging markets, amid growing concerns over transmission of policy tightening to growth and the same rub-off is happening in RBI’s reaction function," said Madhavi Arora, lead economist at Emkay Global Financial Services. According to Arora, RBI has delivered a non-committal pause, but a pause for good.
All said, in an era where global monetary policies are synchronized and major central banks, including the US Federal Reserve, are still tightening rates, RBI may not want to decouple and work as a lone warrior unless push comes to shove. Meanwhile, domestic growth has been resilient so far and RBI’s FY24 GDP projection at 6.5% y-o-y makes India a bright spot in a slow growth world. The central bank is on a wait-and-watch mode and it’s best that the markets also do the same.