Inflation print, US Fed stance: Key factors behind RBI’s hawkish pause on interest rates
- The rate-setting panel also decided to remain focused on withdrawal of accommodation - with five out of six members voting in favor, to ensure that India's headline inflation progressively aligns to the target, while supporting growth.
The Reserve Bank of India (RBI) at its October bi-monthly monetary policy committee (MPC) meeting, kept the benchmark repo rate unchanged at 6.5 per cent for the fourth straight meeting in the current fiscal 2023-24.
The rate-setting panel also decided to remain focused on withdrawal of accommodation - with five out of six members voting in favor, to ensure that India's headline inflation progressively aligns to the target, while supporting growth.
India's consumer price index (CPI)-based inflation eased to a four-month low of 4.87 per cent in October but remained above the RBI's 4 per cent target. The central bank expects inflation to average 5.4 per cent in 2023-24, however, it added that it remains vulnerable to recurring and overlapping food price shocks.
According to a report by DSP Mutual Fund Converse titled, ‘'Converse-Navigating Fixed Income Markets Amid Global Uncertainty’', the checklist for a pause on interest rate hikes by the central bank are as follows:
1. When the US Federal Reserve starts pausing
-Reduces risk of capital outflows
2. When inflation is within comfort
-Reduces risk of inflationary policy
-Barring 2014, when RBI did not have 6 per cent CPI target. But CPI was falling in 2014
3. When balance of payments (BoP) (and currency) is stable
-Reduces inflationary / external risks.
After the latest US Fed's November policy decision and India's October retail inflation print, here's how the above checklist looks now:
↔ 1: US markets indicating no more hikes
-Even though the US central bank remains data dependent
-US Fed to remain on ‘wait and watch’ mode
↔ 2: Inflation not a worry as of now
-Headline as well as core CPI is easing
-Although uncertainty remains
↔ 3: BoP is stable, but rupee has fallen
-BoP in surplus in Q4FY23
-Emerging market (EM) currencies are weakening, and so has rupee.
The report also highlighted central bank has only hiked rates twice in the past 10 years, barring the latest cycle. The interest rates were hiked to control rupee, not inflation. The RBI has tolerance for inflation, but not for a decline in rupee, according to DSP Mutual Fund.
Meanwhile, RBI said in its latest November bulletin that it has increased the risk weights in respect of consumer credit exposure of commercial banks and non-banking finance companies (NBFCs) by 25 percentage points to 125 per cent.
The credit card receivables for banks will attract a risk weight of 150 per cent, while those by NBFCs will attract a risk weight of 125 per cent, compared to 125 per cent and 100 per cent previously.
The RBI also said in its bulletin that the monetary policy is ‘actively disinflationary’ to bring the headline inflation under the 4 per cent target, while supporting domestic growth at the same time.
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A majority of experts believe that the RBI will keep interest rates unchanged in the current financial year and a rate cut could occur in 2024 only if the global economy weakens. Currently, US bond yields and crude oil prices have declined ever since the US Fed paused interest rates at the November meeting.
Aditi Nayar, Chief Economist, Head Research & Outreach, ICRA Ltd said, ‘’We expect the MPC to maintain a hawkish tone amidst a status quo on the rates and stance in its upcoming policy meeting. We see the earliest likelihood of a rate cut in August 2024, when a shallow rate cut cycle of 50-75 bps could commence."
The next RBI monetary policy meeting is scheduled during December 6-8, 2023.
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Business NewsEconomyInflation print, US Fed stance: Key factors behind RBI’s hawkish pause on interest rates
First Published:16 Nov 2023, 09:28 PM IST
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