Pause stays on interest rates; eyes on inflation
Five MPC members voted to keep policy stance at withdrawal of accommodation
The Reserve Bank of India’s (RBI’s) monetary policy committee (MPC) on Thursday kept policy rates unchanged for the second consecutive time, citing sluggish global growth and uncertain inflation trajectory, given the risks associated with a weaker-than-expected monsoon.
The decision to keep the repo rate unchanged at 6.5% was unanimous. However, only five MPC members voted to keep the policy stance unchanged at the withdrawal of accommodation, with member J.R. Verma dissenting. The majority of the members believe that a status quo on policy stance will ensure that inflation progressively aligns with the 4% inflation target while supporting growth.
“With the policy repo rate at 6.5% and full-year projected inflation for 2023-24 at just a little above 5%, the real policy rate continues to be positive,” RBI governor Shaktikanta Das said in a statement.
The average system liquidity, Das said, is still in surplus mode and could increase as ₹2,000 banknotes get deposited in the banks. Das said while headline inflation is easing, it has stayed above the target, warranting close monitoring of the evolving price dynamics.
“Taking all of these factors into account, the MPC decided to remain focused on the withdrawal of accommodation to ensure that inflation progressively aligns with the target while supporting growth,” said Das.
RBI maintained the growth outlook for the current fiscal at 6.5% while marginally reducing the inflation outlook to 5.1% from 5.2% earlier.
Das, however, cautioned that inflationary pressures could be high during the second half of the year, which “needs to be watched and addressed at the appropriate time”. This is despite the moderation in risks to near-term inflation.
Inflation has been above RBI’s upper tolerance limit of 6% since January 2022, pushing the central bank to adopt an aggressive rate-hike cycle from May 2022 to February 2023. Retail inflation, however, fell to 5.66% in March and to 4.7% in April, the lowest reading since November 2021, resulting from past monetary policy tightening and supply-side measures.
“Let me re-emphasize that headline inflation still remains above the target, and being within the tolerance band is not enough. Our goal is to achieve the target of 4%,” Das said.
Economists and market participants viewed the June policy statement as more hawkish than the one in April, given Das’ commitment to meeting the mandated 4% consumer price inflation target. They, however, ruled out further rate hikes in 2023, with possible rate cuts beginning early next year.
“The policy tone was balanced, but it remained non-committal on the decision on future rate actions by MPC,” said Ajit Banerjee, chief investment officer, Shriram Life Insurance Co.
Banerjee said it is probably very unlikely that RBI would precede the Fed in reversing its course of rate hikes in the future. Slowing inflation and a robust economic recovery, he said, are certainly aiding RBI to stay put on rates, but it has raised concerns about the global growth slowdown and the resultant impact it will have on the domestic economy. “After today’s meeting, it seems that the present pause by RBI on rate actions may continue for this calendar year.”
According to Soumya Kanti Ghosh, group chief economic adviser, State Bank of India, while a rate cut any time soon can be ruled out, it should be kept in mind that rate cuts in the past have happened over the cycle. For example, as growth weakened from 8% in FY16 to 6.8% in FY18, RBI cut rates by 200 basis points (bps).
“With GDP growth declining from 9.1% in FY22 to 6.5% in FY24, will this be construed as a signal of growth slowdown and hence future rate actions by RBI? With GDP growth in FY24 set to decline from 8% in Q1 to 5.7% in Q4, we pencil in the first rate cut by RBI in Q4 FY24. The magnitude could be larger than 25 bps,” Ghosh added.
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Business NewsEconomyPause stays on interest rates; eyes on inflation
First Published:8 Jun 2023, 11:52 PM IST
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