The decision of RBI’s Monetary Policy Committee to keep the repo rate unchanged was in line with an almost foregone conclusion. The committee’s 5:1 voting in favour of continuing with the stance of “withdrawal of accommodation” was also not surprising.
The RBI underscored that the vigil on inflation will remain strong as it emphasised the importance of striving for the CPI target of 4 per cent, rather than merely staying within the tolerance band. That, along with the unchanged policy stance, is likely to have further pushed out street expectations of rate cuts to the margin. Given the evolving growth-inflation dynamics, the RBI could continue to be on wait-and-watch mode and keep policy rates on hold for several quarters — probably even beyond calendar 2023. The RBI’s communication has reinforced that expectation.
Despite lowering the Q1 FY24 CPI inflation forecast by 50 basis points, the RBI lowered its CPI projection for the full year only marginally, from 5.2 per cent earlier to 5.1 per cent now. This is judicious amid several risks emanating from a host of factors ranging from weather uncertainties to continued geopolitical risks, and to global recession fears.
On the question of growth, while the RBI underscored India’s relatively strong performance and resilience, it has clearly avoided complacency, by recognising that risks around its FY24 GDP growth forecast of 6.5 per cent are evenly balanced.
Another interesting question is: how confident can one be about no further rate hikes by the RBI in the coming months? After all, central banks in a number of countries (Australia, Canada, etc) hiked their interest rates in recent months even after staying on hold for a while prior to that.
Indeed, the undertone of the RBI’s cautious guidance of “only a pause and not a pivot” is that the central bank is in no rush to ease, and future policy action will remain data-dependent and the central bank may even not refrain from hiking rates again, if needed.
After the two pauses in April and June, one feels that the bar for further hike in the repo rate has moved higher, especially given the trends in various macro parameters in recent months. For example, if the RBI’s CPI forecasts materialise, the current repo rate of 6.5 per cent will imply that India’s real policy rate will hover around over 1.5 per cent during H1 FY24, while maintaining a similar policy rate differential with the US Fed Funds Rate. The RBI currently also enjoys the cushion of a material narrowing of the trade and current account gaps and a range-bound rupee.
Moreover, in case of fresh upward pressure on inflation, the RBI’s reaction will likely depend critically on how broad-based those inflationary pressures are, and whether there exits risks of spill-over, and entrenching inflation expectations.
In the context of US policy, the Fed is expected to stay on hold in their upcoming meeting next week. However, the Fed’s dot plot will possibly be more interesting than its rate action. In March, 11 of the 18 Fed governors, who decide the US Fed Funds Rate, did not expect the same to exceed the current 5-5.25 per cent range in 2023. It would be interesting to know in which direction the dot plot has moved in the last three months.
Of late, monetary policies in India have been prudent, balancing long-term objectives and near-term priorities, along with decisive and front-loaded action — a trend that is likely to continue in the foreseeable future.
The writer is Chief Economist & Head of Research in Bandhan Bank. The assistance of Gaurav Mukherjee is acknowledged. Views are personal