Over the past one year, home loan borrowers were a worried lot as their interest rates rose sharply on the back of a 250 basis points increase in the the repo rate by the Reserve Bank of India's monetary policy committee (MPC) between May 2022 and February 2023.
The MPC's decision to keep the benchmark rate at which the RBI lends money to commercial banks on hold at 6.50 per cent for the second consecutive time should bring some respite to the borrowers. But, the MPC stressing on getting the inflation to 4 per cent and flagging uncertainties on the monsoon and how global central banks move on interest rates, suggests the rates could remain on hold for longer period and expectations of any rate cut over the next few months have diminished.
The RBI's decision to maintain a status quo this time around comes in the backdrop of softening retail inflation and a stronger GDP growth in the fourth quarter and full year 2022-23. But, Governor Shaktikanta Das has also raised concerns on the trajectory of the monsoon this year and a potential impact of El Nino conditions on the path ahead.
So, even as the latest inflation print for April (4.7 per cent) was well within the RBI's 2 per cent to 6 per cent target, the central bank will be watching closely on how it pans out and the impact monsoon has on food prices and the wider rural economy in the months ahead. Global headwinds also persist and some central banks continue to tighten monetary policies. So, the interest rates are likely to remain steady for longer.
"It looks like the market wait for rate cuts just got longer, as we saw Canada policy makers announce a surprise rate hike. Key incoming data dependency will continue to be the order of the day," said Lakshmi Iyer, CEO - investment and strategy, Kotak Investment Advisors.
The RBI expects that inflation in the current financial year will remain above 5 per cent. It has also retained its GDP growth forecast for 2023-24 at 6.50 per cent. Unless there is a major divergence there, economists see the MPC keeping the interest rates on hold for longer period.
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"RBI staying on a pause and maintaining its stance was in line with expectations. The RBI remains cautious on the inflation trajectory especially as inflation will remain above the 4 per cent target for the foreseeable future. We believe that rate cuts will be contingent on significant divergence in growth-inflation prospects. We maintain our call that the RBI will be on an extended pause," said Suvodeep Rakshit, senior economist, Kotak Institutional Equities.
Agrees Siddhartha Sanyal, chief economist and head of research at Bandhan Bank, who feels the central bank is likely to keep the repo rate unchanged likely beyond the current calendar year.
"The emphasis on achieving the 4 per cent target and keeping the stance of policy unchanged at withdrawal of accommodation likely have pushed out expectations of rate cuts at the margin," said Sanyal.
Suman Chowdhury, chief economist and head of research at Acuite Ratings and Research feels the MPC would like to keep all its option open at this stage given central banks in several developed economies have continued with moderate rate hikes and there is a lack of clarity on the peak rate and pivot thereafter.
He also feels the MPC sounded relatively hawkish on inflation. Governor Das, for instance, had emphasised in his statement that inflation being within the tolerance band was not enough and the goal was to achieve the 4 per cent target.
"Clearly RBI takes into cognizance the upside risks to inflation emerging from the impact of a potential El Nino on monsoon and consequently on food prices. It has continued to be optimistic on the growth prospects for the current year and kept it pegged at 6.5 per cent. Given such expectations of the central bank on growth-inflation dynamics, the likelihood of an extended pause on interest rates has increased," said Chowdhury.
Any possible rate cut may not materialise before the last quarter of 2023-24, he felt.
Indranil Pan, chief economist at Yes Bank, also felt that RBI's communication on inflation was hawkish and one should not expect any reduction in the policy rate soon, may be even through the rest of the current financial year.
By lowering its inflation forecast only marginally to 5.1 per cent from 5.2 per cent, the central bank seems to be building in a buffer for any food price spikes due to weather related disturbances during monsoon and if these risks don't pan out, inflation could be lower and the subsequent communication could become more dowish, said Abheek Barua, chief economist at HDFC Bank.
"Any rate cut expectations in 2023 that was being built up in the market are likely to be pushed forward for now," he said.