Pause not a pivot; RBI keeps repo rate on hold

Since May 2022, the repo rate has been raised by 250 basis points

rbi-repo-rate Representational image | PTI

Home loan borrowers will be relieved. After six repo rate hikes in a row, the Reserve Bank of India's monetary policy committee (MPC) hit the pause button on Thursday, contrary to the broader expectation of a 25 bps increase. 

Since May 2022, the repo rate, the benchmark rate at which RBI lends to commercial banks, has been raised by 250 basis points from 4 per cent to 6.50 per cent and it will stay there for now. RBI Governor Shaktikanta Das said that this was a "pause" and not a "pivot." He also stressed that the fight against inflation was far from over. 

After all, the retail inflation remains well above the central bank's target of 4 per cent. February Consumer Price Index was at 6.44 per cent, above the upper end of the 2-6 per cent targeted inflation band of the RBI too. 

But, the RBI is expecting inflation to come down. It has forecast CPI at 5.2 per cent for the 2023-24 financial year. At the same time, it has raised its GDP growth forecast from 6.4 per cent to 6.5 per cent. 

Das also flagged the crisis in the banking system in US and Europe as among the concerns. 

"The fear that speed can kill has led to dovish turn from several central banks amid growing concerns over transmission of policy tightening to growth and the same rub-off is happening in RBI's reaction function," opined Madhavi Arora, lead economist at Emkay Global Financial Services.

Arun Singh, global chief economist at Dun and Bradstreet India also feels a pause was necessary to assess the impact of previous rate hikes and balance the growth and inflation dynamics.

"There is a renewed caution in the global economic landscape and optimism for a turnaround in global economic prospects is waning. Bank collapses in the first half of March 2023 have led to fears of contagion risk across financial markets. Even though India's growth has been resilient so far, the country is not decoupled," said Singh.

With the RBI MPC stressing that the pause was for this policy, it has sort of kept a door open for any further rate hike if need be. Economists remain divided on this front whether there is still scope for a rate hike if inflation remains above target or if we see a long pause in rates from here on. 

"Given the uncertain global environment and lingering risks to inflation, it is only apt that the central bank keeps the window open for further monetary policy tightening in future if required. However, with inflation likely to trend downwards from the current level, it is unlikely that RBI will have to hike rates further in 2023," said Rajani Sinha, chief economist at CARE Ratings. 

RBI's growth and inflation outlook perhaps suggests that the scope for further hikes is "limited," feels Suvodeep Rakshit, Senior Economist, Kotak Institutional Equities, who sees this policy as a "hawkish pause."

"The tone of the policy remains concerned on inflation, especially core inflation and remains focused on reaching the 4 per cent target over the medium term. The RBI remains comfortable on the growth front, for now. We believe the risks to this outlook are skewed towards the downside," said Rakshit.

He expects the RBI MPC will remain on an "extended pause."

Namrata Mittal, senior economist at SBI Mutual Fund too feels that contained commodity costs could keep inflation anchored around 5 per cent defying the need for any further hike in this cycle.

"The lag effect of earlier actions and the cumulative monetary and liquidity tightening should enable policy rates to stay on hold incrementally," said Mittal.

According to Suman Chowdhury, a chief analytical officer at Acuite Ratings, the decision to pause was primarily induced by the turbulence in the global banking sector. The improvement in India's current account position may have also helped, he said.

"It is a wait-and-watch policy being adopted for now, not only on the global environment but also on the domestic inflation print. The likelihood of a continued pause and a pivot to lower rates in the current year is still uncertain. RBI has highlighted the potential risks from food inflation given the uncertainty on the current year's monsoon, along with a significant likelihood of the core inflation levels remaining above 6 per cent in the near term due to resilient domestic demand," said Chowdhury. 

How things pan out over the next few months on the inflation as well as global growth front may well have bearing on the next move by the RBI MPC. For now, though, the decision to hold repo rate may put to rest the anxiety among the borrowers that emanated with the EMI increase consequent to a series of repo rate hikes, said V. Viswanatha Gowd, MD and CEO of LIC Housing Finance.

"Today's move sends a positive signal and improves the sentiments," he said. 

Dharmakirti Joshi, chief economist at CRISIL believes the phase of "aggressive rate hikes" may be behind us. The after-effects on financial conditions along with any upside to inflation would be risks to watch for in this financial year, he added. 

However, Aditi Nayar, chief economist and head of research and outreach at ICRA feel if inflation does not fall in line with the MPC's decision for the April-June quarter, another hike could be in the offing, especially if the financial stability situation stabilises.

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