With CPI inflation for April moving down to 4.7 per cent, expectations were that the RBI could adopt a more dovish stance regarding its future policy action. The monetary policy committee has however flattened these hopes, maintaining status quo on policy rates and pushing the goal post further with respect to reversal in the rate cycle. The Governor has once again stated, and perhaps not without reason, that this is a pause in policy rate cycle and not a pivot.

Besides, there was a subtle indication that market should not expect a cut in policy rates anytime soon. This was implied in the central bank’s move to change its inflation target to 4 per cent, instead of the band between 2 and 6 per cent, as suggested by the flexible inflation targeting framework. With the RBI projecting the inflation for FY24 at 5.1 per cent and for the four quarters of this fiscal year at 4.6 per cent, 5.2 per cent, 5.4 per cent and 5.4 per cent respectively, policy rate cuts appear unlikely until the next fiscal year. The RBI’s watchful response regarding future policy moves arises out of challenging conditions globally with nebulous growth, sticky inflation and turbulent financial markets. Although many advanced and emerging economies had paused their rate hikes in recent months, sudden rate hikes of 25 basis points by Reserve Bank of Australia and Bank of Canada this week suggest that the fight against inflation is far from over.

Notwithstanding these genuine compulsions, the central bank should be mindful of the impact of the continued high interest rates on consumption. The central bank’s bid to keep system liquidity at a neutral level to hold the money market rates close to the repo rate will result in interest rates in the economy firming up further, impacting growth. Growth in private final consumption expenditure in the fourth quarter of FY23 was mere 2.8 per cent. While urban demand has been led by the buoyancy in services sector, rural demand has been slowing. Growth in priority housing loans was an anaemic 1 per cent in FY23 while non-priority housing loans grew 23 per cent, which could hurt borrowers with a lower income profile. Though the RBI has retained growth for FY24 at 6.5 per cent, it could be K shaped with low-income households being left out.

The proposal to issue guidelines for compromise settlements and technical write-offs and extend this facility to co-operative banks will ease the process for addressing NPAs further. Similarly, the framework governing digital lending will be fortified once the guidelines for default loss guarantee arrangements are issued. Such arrangements between fintechs and partner banks or NBFCs lay down that the fintech firm will bear the loss if the borrower defaults. This will provide greater certainty to the partnering banks. Similarly RuPay prepaid forex cards will give Indians travelling overseas yet another option for payment.