India’s Monetary Policy Committee (MPC) has taken a pragmatic call in deciding to pause policy rate hikes in its April review. After the series of increases totalling 250 basis points since last May, it was prudent to take stock of the impact of this tightening spree on economic activity, borrowers and lending institutions.

Given recently elevated inflation readings, the MPC has also done well to adopt hawkish language in its statement, leaving the market in no doubt that further hikes will be considered, should inflation fail to moderate to its comfort zone of 2-6 per cent. A tight rein will be maintained on liquidity by the continued stance on withdrawing accommodation. The fact that the rate pause decision was unanimous in the six-member MPC, lends confidence that it was a well-considered call.

The case for a pause was strong on several counts. One, policy rate hikes in India typically take a three to four quarters to flow through to the economy. The full impact of the rate hikes is yet to be felt by businesses and borrowers. A recent RBI study showed that while policy rates were up by 250 basis points between May 2022 and February 2023, banks had transmitted only 93 basis points to older borrowers and 173 basis points to new ones. There are already reports of rising floating rates pressuring home loan borrowers. Two, despite positive trends in high-frequency economic indicators, there is a growing worry that India’s growth momentum this year will be impacted by a US recession, a shaky Chinese economy and the unfolding banking crisis in the West. Persisting with rate hikes could have put India’s hard-won economic rebound and financial stability after Covid, at risk. Three, with the US banking crisis forcing the Fed to re-open the taps of liquidity and US treasury yields retreating as a result, the pressure on Indian policymakers to follow in the Fed’s footsteps has eased. The narrowing of India’s current account deficit in Q3 has also offered breathing space on exchange rates. Four, though the last two CPI inflation readings at 6.52 per cent for January and 6.44 per cent for February 2023 were above RBI’s target range, they seem to have been influenced by volatile cereal and milk prices. With the global economy set to weaken this year and China-Russia supply constraints easing, the MPC seems to believe that the threat to domestic price stability from imported inflation is receding.

But the tightrope walk for MPC is far from over. It has projected CPI inflation at 5.2 per cent for FY24 (5.1 per cent for Q1), based on the assumption of a normal monsoon. But a brewing El Nino could resuscitate inflation. In this case, the RBI will need to prevail upon the Centre to initiate timely non-monetary measures. With fluid global economic prospects, a 6.5 per cent GDP growth forecast for FY24 (7.8 per cent in Q1) may be optimistic. Overall, the growth-inflation trade-off is unlikely to ease up in the months ahead.