The Reserve Bank of India (RBI) surprised all by keeping the policy repo rate unchanged at 6.5 per cent on Thursday, after hiking interest rate by a cumulative 250 basis points in the past 11 months. The RBI unexpectedly kept benchmark rate unchanged as global banking woes added uncertainty to the economic outlook. The RBI move has found support from the banker community.
RBI Governor Shaktikanta Das, however, pledged to hike the interest rate again if needed, saying the decision to pause was “for this meeting only”.
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. 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.
“MPC unanimously decided to keep rates unchanged in this meeting with readiness to act if the situation so warrants,” Das said while announcing the decisions of the committee. “MPC will not hesitate to take further action as may be required in its future meetings.”
He said that MPC is ready to act if necessary as the decision to keep the rate unchanged is “a pause, not a pivot.” Reacting to the decision, Finance Minister Nirmala Sitharaman said, “RBI has taken a good call, I think.”
Interest rates have been effectively tightened by 290 basis points in the past year --- a 250 bps increase in the repo rate and a 40 bps increase when the SDF was introduced. RBI remained cautious about the inflation outlook and relatively upbeat on growth.
The central bank 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 projected 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 per 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.
The RBI move also found support from the banker community. Industry lobby Indian Banks Association chairman AK Goel, who is also the chief executive of Punjab National Bank, said it is a welcome pause which could surprise the market. “Focus of RBI in this policy is to support growth as it wants to evaluate the effects of the previous rate actions to fully get transmitted into the economy,” he said.
SBI chairman Dinesh Khara termed it a “pleasant surprise” given the market talks of one more final rate hike. “With uncertainty looming large, this decision was perfectly timed”.
“Simultaneously, the bouquet of regulatory initiatives like linking UPI to credit and developing the onshore market will spur innovations in product offerings,” Khara said.
Bank of Baroda economist Sonal Badhan said given the baseline assumptions, RBI is not expected to hike rates any further this year.
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 at rating agency 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, Acuité 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.”
