The six-member monetary policy committee (MPC) of the Reserve Bank of India (RBI) on Thursday decided to maintain the status quo in the repo rate for the second consecutive review meeting, basing itself on easing inflation and brighter growth prospects.
At the same time, the central bank decided to return to its primary objective of targeting headline inflation of 4 per cent, which was kept in abeyance in the past three years due to successive shocks like the pandemic and a war in Europe.
The MPC’s second straight pause comes after surprise hikes in policy rates by the Reserve Bank of Australia (RBA) and the Bank of Canada (BoC) following their previous pause. The RBI paused in April after a hike of 250 basis points in the repo rate between May 2022 and February 2023, to 6.5 per cent, emphasising that its decision to pause should not be seen as “pivot”.
While all six MPC members were unanimous in keeping the repo rate at 6.5 per cent, external member Jayanth Varma differed with the stance.
The RBI maintained its stance to remain focused on withdrawal of accommodation to ensure that inflation progressively aligned with the target, while supporting growth.
“In India, 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, according to the latest data, and is expected to remain so according to our projections for 2023-24,” RBI Governor Shaktikanta Das said while emphasising continued vigil on inflation especially as the monsoon outlook and the impact of El Nino remained uncertain.
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“It [MPC] will take further monetary actions promptly and appropriately as required to keep inflation expectations firmly anchored and bring down inflation to the target.”
The central bank, however, lowered the FY24 inflation target marginally to 5.1 per cent from 5.2 per cent projected in the April policy.
The yield on the 10-year benchmark government security moved up four basis points to 7.02 per cent as the tone of the policy turned hawkish.
The central bank retained the growth projection for FY24 at 6.5 per cent.
“Turning to 2023-24, domestic demand conditions remain supportive of growth on the back of improving household consumption and investment activity … Rural demand is also on a revival path -- sales of motorcycles and three-wheelers increased at a robust pace (y-o-y) in April while tractor sales remained subdued,” Das said.
Commenting on the liquidity situation, Das said the RBI would be nimble in liquidity management.
On banks’ reluctance to park surplus funds in the variable rate reverse repo auction (VRRR), Deputy Governor Michael Patra said it would be because of advance tax by the middle of this month, which could drain out liquidity.
The recent VRRR auctions had sucked Rs 1.5 trillion out of the system, Das said.
Describing the RBI’s action as “Goldilocks pause”, Aurodeep Nandi, India economist of Nomura, said: “Das remained bullish on growth and hawkish on inflation, reiterating the RBI’s inflation target of 4 per cent. Our macro view remains both growth and inflation are likely to undershoot the RBI’s projections in FY24.”
The hawkish tone of the policy has dashed hopes of a cut in the repo rate anytime soon.
“The emphasis on 4 per cent is to clearly anchor market expectations for the future. While we rule out a rate cut anytime soon … we pencil in the first rate cut by the RBI in Q4FY24. The magnitude could be larger than 25 basis points,” said Soumya Kanti Ghosh, group chief economic adviser, State Bank of India.
HDFC Bank economists said while the RBI emphasised aligning the repo rate to a 4 per cent inflation rate, it might not mean the central bank would keep rates on hold till then.
“…it does not mean that the RBI will keep rates on hold until inflation actually reaches 4 per cent. We think that once the inflation uncertainty moderates and a path towards the 4 per cent target is visible, the RBI could start its rate cut cycle if growth conditions so demand. We do not see this happening before Q1 2024,” HDFC Bank said.
A pause in the next policy, scheduled between August 8 and 10, is almost certain, though opinion is divided on the timing when the rate cut cycle to begin.