New Delhi: In what has come as a surprise move, the Reserve Bank of India’s Monetary Policy Committee (MPC) has decided to keep the benchmark repo rate unchanged at 6.5 per cent citing additional financial stability concerns. However, RBI Governor Shaktikanta Das indicated that this pause does not preclude future rate hikes, if the situation demands it.
The Monetary Policy Committee announced its decision Thursday, at the conclusion of its meeting, held between Monday and Thursday. The repo rate is the rate at which the RBI lends to commercial banks. This rate determines the rate at which commercial banks lend money to their customers. The repo rate is one of the primary tools the RBI has to control inflation.
Notably, the decision by the MPC was unanimous, meaning all members were in agreement that a pause in rate hikes was in order. Since May last year, the central bank has cumulatively hiked interest rates 250 basis points, from 4 per cent to 6.5 per cent.
While industry insiders have termed the MPC’s decision to keep the repo rate unchanged as “surprising”, they have said that it was a “balanced” call, “giving primacy to growth”.
The RBI also expects growth in the 2023-24 financial year to be slightly higher than it had earlier estimated, revising the outlook for the year to 6.5 per cent from 6.4 per cent. On the inflation front as well, the outlook is slightly better than earlier, with the full year’s inflation expected to be 5.2 per cent, down from the earlier estimate of 5.3 per cent.
“The MPC met on 3rd, 5th and 6th April 2023 and assessed the macroeconomic situation and its outlook,” RBI Governor and chairman of the MPC Shaktikanta Das said in his statement announcing the MPC’s decision. “It decided unanimously to keep the policy repo rate unchanged at 6.50 per cent in this meeting with readiness to act, should the situation so warrant.”
Das further pointed towards the dual issues of increased risks to growth in economic activity coupled with inflation still remaining above the RBI’s comfort levels. The RBI has set an inflation target of 4 per cent, with leeway for it to vary between the 2 per cent to 6 per cent range. Retail inflation in February, the latest data available, was at 6.44 per cent.
“While the recent high frequency indicators suggest some improvement in global economic activity, the outlook is now tempered by additional downside risks from financial stability concerns,” Das said. “Headline inflation is moderating, but remains well above the targets of central banks.”
The governor said that economic activity in India “remains resilient”, a fact highlighted by external agencies like the World Bank as well. On inflation, he said that consumer price inflation has increased since December 2022, driven by the prices of cereals, milk and fruits. Core inflation remains elevated, he added.
“Looking ahead, headline inflation is projected to moderate in 2023-24,” Das explained. “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,” he emphasised, however.
On the future actions of the MPC, the RBI governor further said that “we (the MPC) have to be extremely prudent in our actions” and that the rate-setting body has so far been “very watchful” and has adopted a calibrated and balanced approach and will continue to do so.
Also read: ‘Need to see a decisive moderation in inflation’: RBI Governor on 25 bps repo rate hike
Surprising yet balanced
The MPC’s decision to keep rates unchanged has come as a surprise to many, who expected it to raise rates by another 25 basis points in line with the actions taken by the US Federal Reserve last month.
“The credit policy announced today had two surprises,” Madan Sabnavis, chief economist at Bank of Baroda, said in a note following the decision. “First the repo rate has been unchanged while the market had taken it for granted that there would be a 25 bps hike.”
“However, the caveat has been fixed that this should not be interpreted as being the end of the rate hike cycle and there is scope for further hikes if warranted,” Sabnavis added. “Therefore the status quo in repo rate cannot be interpreted as being a ‘pause from hereon’.”
Export bodies similarly were surprised by the MPC’s decision, but said that this would help exporters who have been seeing credit becoming more costly for them due to the previous rate hikes by the MPC.
“While most central banks have given more weightage to inflation as compared to growth, RBI struck a nice balance between the two, giving primacy to growth,” A. Sakthivel, president of the Federation of Indian Export Organisations (FIEO) said, adding that the rate hike pause will further boost growth through increasing investment.
“The status quo in rates will also help our exporters whose cost of credit has gone up substantially due to upward revision in rate in the last one and half years leading to the demand to increase the interest subvention from 2 per cent and 3 per cent to 3 per cent and 5 per cent, respectively,” he added.
Growth, inflation outlooks tweaked
“The second surprise is that the RBI has marginally raised the GDP forecast to 6.5 per cent from 6.4 per cent earlier and (lowered) inflation to 5.2 per cent from 5.3 per cent,” Sabnavis said.
“While the numbers may not really be significant, the messaging is subtle that the MPC expects the economy to fare well on both counts this year,” he added. “This comes at a time when the World Bank has just lowered its forecast of GDP for India.”
The data provided by the RBI governor, however, shows that although the overall growth estimate for 2023-24 has been marginally hiked, the rate of growth is set to slow in each subsequent quarter. That is, Q1 (April-June) is expected to see growth at 7.8 per cent, Q2 (July-September) at 6.2 per cent, Q3 (October-December) at 6.1 per cent, and Q4 (January-April 2024) at 5.9 per cent.
“… Assuming an annual average crude oil price (Indian basket) of $85 per barrel and a normal monsoon, CPI inflation is projected to moderate to 5.2 per cent for 2023-24; with Q1 at 5.1 per cent; Q2 at 5.4 per cent; Q3 at 5.4 per cent; and Q4 at 5.2 per cent,” Das said.
(Edited by Poulomi Banerjee)
Also read: Rising wheat & milk prices, high core inflation: Why RBI’s rate hike cycle is unlikely to pause