After raising interest rate by a cumulative 250 basis points in 11 months, the Reserve Bank of India (RBI) on Thursday unexpectedly kept benchmark rate unchanged as global banking woes added uncertainty to the economic outlook.
RBI Governor Shaktikanta Das however pledged to hike interest rate again if needed, saying the decision to pause was “for this meeting only”. The RBI’s six-member Monetary Policy Committee voted unanimously to keep the repurchase or repo rate unchanged at 6.50 per cent. Most analysts had expected one final hike of 25 basis points in RBI’s current tightening cycle before hitting a pause. The MPC also decided to retain a policy stance focused on “withdrawal of accommodation” to “ensure that inflation progressively aligns with the target, while supporting growth.”
That had been its approach since it started tightening in May 2022. “The MPC unanimously decided to keep rates unchanged in this meeting with readiness to act if the situation so warrants,” Das said announcing the decisions of MPC. “The MPC will not hesitate to take further action as may be required in its future meetings.” RBI has raised interest rate by a total of 250 basis points since May 2022. It marginally upped its forecast of India’s GDP growth in the current fiscal year starting April 1 to 6.5 per cent from 6.4 per cent forecast earlier. This compares with an expected 7 per cent growth in 2022-23 (April 2022 to March 2023) fiscal.
The central bank lowered its inflation forecast to 5.2 per cent for 2023-24 from 5.3 pre cent with Das saying “war against inflation has to continue”. He said it was necessary to evaluate the cumulative impact of past interest rate hikes. The surprise pause comes even as core inflation stayed above 6 per cent for 17 straight months. “Our job is not yet finished and the war against inflation has to continue until we see a durable decline in inflation closer to the target,” he said. Commenting on the decision, Anu Aggarwal, President of Corporate Banking, at Kotak Mahindra Bank, said, “Leaving the policy rates unchanged is a very welcoming news, especially considering the nervousness that had built up post the OPEC production cut.”
Das said the global economic scenario has undergone a dramatic shift – from improving supply conditions, resilient economic activity and financial markets exuding greater optimism at the start of 2023 to the global economy now witnessing a renewed phase of turbulence with fresh headwinds from the banking sector turmoil in some advanced economies. “Bank failures and contagion risk have brought financial stability issues to the forefront,” he said. “Given the stubbornness in inflation, central banks continue to tighten monetary policy, although at a reduced pace.”
Explaining the rationale behind MPC’s decision to pause rate hike, he said 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. Headline inflation is moderating but remains well above the targets of central banks. The sudden announcement of an output cut by OPEC+ a few days ago and the resultant jump in crude oil prices is yet another evidence of this volatility, he said. “When we started the rate cut cycle in February 2019 to provide support to growth, the CPI inflation was around 2 per cent and the policy repo rate was 6.50 per cent. Now, the policy rate is 6.50 per cent but inflation is 6.4 per cent (February 2023),” he said.
Looking ahead, the expectation of a record rabi harvest bodes well for easing of food price pressures, he said. Other measures announced include allowing pre-sanctioned credit lines via the unified payments interface and a web portal to enable search across multiple banks for possible unclaimed deposits. Also, RBI announced a provision for SMS/email alerts to customers whenever their credit information reports are accessed. Aditi Nayar, Chief Economist, Head – Research & Outreach, ICRA, said financial stability concerns appear to have pre-empted a pause as MPC assesses the impact of its cumulative 250 bps of rate hikes.
“If inflation does not fall in line with MPC’s assessment for Q1 FY2024, another hike could be in the offing, especially if the financial stability situation stabilises,” she said. Suman Chowdhury, Chief Analytical Officer, Acuit Ratings & Research, said the pause has been primarily induced by the turbulence in the global banking sector brought about by the failures of a few regional banks in the US and the potential contagion risks in other parts of the world. “It is a ‘wait and watch’ policy being adopted for now not only on the global environment but also on the domestic inflation print,” Chowdhury said. “In our opinion, the likelihood of a continued pause and a pivot to lower rates in the current year are still uncertain.”
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