RBI Monetary Policy: MPC opts for hawkish pause, focused on 4% inflation target; here’s what experts say

The Reserve Bank of India (RBI) Thursday left the main policy instrument, repo rate, unchanged at 6.50 per cent for the second consecutive monetary policy, giving relief to home, vehicle and other retail borrowers from an increase in equated monthly instalments (EMIs).

The decision to keep the repo rate — it is the interest rate at which the RBI lends to banks in the country — unchanged was taken unanimously by the six Monetary Policy Committee (MPC) members as inflation continues to remain above the 4 per cent target. The RBI has been mandated by the government to keep consumer price index-based inflation (CPI) at 4 per cent with a band of +/- 2 per cent.

In a 5:1 majority, the rate-setting panel also decided to remain focused on withdrawal of accommodation. In the April 2023 policy, the RBI had paused its rate hike cycle after raising the key lending rate for six consecutive times since May 2022.

The RBI retained the real GDP growth projection at 6.5 per cent for FY2024 but cut the inflation projection marginally from 5.2 per cent to 5.1 per cent for the current fiscal.

While announcing the policy, RBI Governor Shaktikanta Das said the consumer price inflation eased during March-April 2023 and moved into the tolerance band, declining from 6.7 per cent in 2022-23.

“Headline inflation, however, is still above the target as per the latest data and is expected to remain so according to our projections for 2023-24. Therefore, close and continued vigil on the evolving inflation outlook is absolutely necessary, especially as the monsoon outlook and the impact of El Nino remain uncertain,” Das said, adding that real GDP growth in 2022-23, on the other hand, has turned out to be stronger than anticipated and is holding up well.

He said the policy repo rate has been increased by 250 basis points (bps) since May 2022 and is still working its way through the system. Its fuller effects will be seen in the coming.

“Against this backdrop, the MPC decided to keep the policy repo rate unchanged at 6.50 per cent. The MPC will continue to remain vigilant on the evolving inflation and growth outlook. It will take further monetary actions promptly and appropriately as required to keep inflation expectations firmly anchored and bring down inflation to the target,” Das said.

He, however, said that the rate action in the policy is “a pause and not a pivot”. “It is a pause in this meeting of the MPC. I have not said anything about pivot. So, whatever I said in the last (April 2023) meeting that it’s not a pivot, I reiterate that,” he said.

On the impact of the recent increase in minimum support price (MSP) on inflation, Das said part of the hike is already built into the inflation projections.

RBI Deputy Governor Michael Patra said, “We got the MSP data yesterday (Wednesday) and we find that the average increase across all crops is about 7.5-8 per cent. So over and above our (CPI) projections, this will impact to the extent of 10-12 bps.”

Asked whether the RBI is closer to a change in its stance of withdrawal of accommodation compared to the April policy, Das said, “Our target (for CPI) is 4 per cent. So, our effort will also be to align all our actions to move towards and reach the target. It will, therefore, depend on the evolving situation. To say anything more than that, given the kind of uncertainties which still persists, is not desirable at this stage.”

On growth, Das said the Indian economy presents a story of resilience with macro-economic and financial stability. Prospects for growth are steadily improving and becoming broad based.

“Higher rabi crop production, expected normal monsoon, continued buoyancy in services and softening inflation should support household consumption. On the other hand, given the healthy twin balance sheets of banks and corporates, supply chain normalisation and declining uncertainty, conditions are favourable for the capex cycle to gain momentum,” he said.

He said the headwinds from weak external demand, volatility in global financial markets, protracted geopolitical tensions and intensity of El Nino impact, however, pose risks to the growth outlook.

On the liquidity condition, Das said the decline in currency in circulation and pick-up in government spending have expanded the system liquidity. This got further augmented due to the RBI’s market operations and the deposit of Rs 2,000 banknotes in banks.

“Going forward, the Reserve Bank will remain nimble in its liquidity management, while ensuring that adequate resources are available for the productive requirements of the economy,” he said, adding that the central bank will ensure the orderly completion of the government’s market borrowing programme.

Bankers said the RBI decision to pause was largely on expected lines. “The communication was nuanced and tailored to anchor market expectations for the future in terms of a durable glide path of inflation,” State Bank of India Chairman Dinesh Khara said.

The current pause still signals a tightening stance as projected inflation continues to be above the tolerance band of RBI. From this perspective, the current policy remains a non-event, largely on expected lines, the SBI said in a research report.
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