The RBI’s rate pause is premised upon conviction that inflation concerns are being addressed
By keeping the repo rate at 6.5 per cent, the Reserve Bank of India’s Monetary Policy Committee (MPC) has surprised capital markets as well as India Inc. Given the fact that retail inflation was 6.44 per cent year-on-year in February, though down from 6.52 per cent in January, 25 bps hike in the key rate was widely expected. The RBI tolerance range for inflation is 4-6 per cent. Yet, the central bank was not deterred by price concerns; all six MPC members, who are mandated to set the policy rate, unanimously decided to keep it unchanged at 6.5 per cent. But this is a “hawkish” pause, in the words of RBI Governor Shaktikanta Das. “With CPI headline inflation ruling persistently above the tolerance band, the MPC decided to remain resolutely focused on aligning inflation with the target. It is essential to rein in the generalisation of price pressures and anchor inflation expectations,” the RBI press release said. The policy rate has gone up, in phases, by a total of 250 basis points since May 2022. The RBI has tried to strike a balance between inflation control and the growth imperative, arguing that low and stable prices are essential for the resilience in domestic economic activity on a sustainable basis. The central bank, however, keeps an hawkish eye on prices: “The MPC will continue to keep a strong vigil on the evolving inflation and growth outlook and will not hesitate to take further action as may be required in its future meetings.”
The surprise over the pause was also because of a generally good growth rate predicted by various organizations, including the RBI, which upwardly revised growth for the current fiscal from 6.4 per cent to 6.5 per cent. Other estimates are also not much different. The Government’s Economic Survey 2022-23 pegged gross domestic product (GDP) expansion at 6.5 per cent for the current fiscal. The Asian Development Bank’s (ADB’s) estimate about India’s GDP growth is actually higher—6.7 per cent for 2023-24. This, the ADB says, will be “driven by private consumption and private investment on the back of government policies to improve transport infrastructure, logistics, and the business ecosystem.” The World Bank, though it brought down its GDP forecast for India for the current fiscal to 6.3 per cent from 6.6 per cent, also said recently, “India is still going to be one of the fastest-growing economies in the world.” This is quite impressive when the global economy, according to International Monetary Fund (IMF) chief Kristalina Georgieva, is expected to grow at less than 3 per cent this year. India and China are expected to contribute half to global growth this calendar year. On its own, India is likely to account for 15 per cent of total global GDP expansion. Apparently, the RBI, which projects inflation in 2023-24 at 5.2 per cent, is of the view that inflation concerns are being systemically addressed. Hopefully, that is true. Otherwise, well, the hawkish stance is there.