RBI Monetary Policy Highlights: Surprise Rate Pause, But War Against Inflation To Continue

India's Monetary Policy Committee has decided to keep the benchmark repo rate unchanged, RBI Governor Shaktikanta Das said, adding that the committee was ready to act should the situation so warrant.

Following the review, the MPC decided:

• To keep the repo rate unchanged at 6.5% unanimously.

• The standing deposit facility rate, pegged 25 basis points below the repo rate, is at 6.25%.

• The marginal standing facility rate, which is 25 basis points above the repo rate, is at 6.75%.

The MPC will not hesitate to take further action as maybe required in it's future meetings, Das said. The committee has raised the benchmark repo rate by 250 basis points in the last eleven months.

The committee had first raised rates by 40 basis points at an unscheduled meeting in May last year, followed by 50 basis points each in June, August and September. It raised rates by a further 35 basis points in December last year, followed by a hike of 25 basis points in February this year.

The MPC decided with 5:1 majority to remain focused on withdrawal of accommodation to ensure that inflation progressively aligns with the target, while supporting growth. Jayanth Varma expressed reservations on this part of the resolution.

The MPC's move has been primarily induced by the turbulence in the global banking sector brought about by the failures of a few regional banks in US and the potential contagion risks in other parts of the world, said Suman Chowdhury, chief analytical officer at Acuite Ratings. In other words, it is a “wait and watch” policy being adopted for now not only on the global environment but also on the domestic inflation print.

What has also helped in taking a pause decision for now is the moderation in the hawkish stance from the Fed, weakness in the U.S. dollar and the recent improvement in India’s current account position. Nevertheless, the communication from the RBI has highlighted that the war with inflation is not yet over and the MPC will be ready to take any further hike in rates if the concerns on inflation increase further, he said.

Madhavi Arora, lead economist at Emkay also said that the unchanged policy rate and stance has been met by non-committal forward guidance, clearly giving more stress to fluid and uncertain global situation, implying macro assessments might require appropriate adjustments ahead from the policy perspective. However, the governor stressed that their inflation fight is not over and we are still away from durable disinflation with unyielding core inflation still a concern, she added.

Inflation Outlook

Headline inflation is seen moderating in 2023-24, Das said.

The inflation trajectory for 2023-24 would be shaped by both domestic and global factors.

• The expectation of a record rabi foodgrains production bodes well for the food prices outlook. The impact of recent unseasonal rains and hailstorms, however, needs to be watched.

• Crude oil prices outlook is subject to high uncertainty. Global financial market volatility has surged, with potential upsides for imported inflation risks.

• Easing cost conditions are leading to some moderation in the pace of output price increases in manufacturing and services, as indicated by the Reserve Bank’s enterprise surveys. The lagged passthrough of input costs could, however, keep core inflation elevated.

Growth Outlook

Economic activity remains resilient, Das said.

• A good rabi crop should strengthen rural demand, while the sustained buoyancy in contact-intensive services should support urban demand.

• The government’s thrust on capital expenditure, above trend capacity utilisation in manufacturing, double digit credit growth and the moderation in commodity prices are expected to bolster manufacturing and investment activity.

• According to the RBI’s surveys, businesses and consumers are optimistic about the future outlook. The external demand drag could accentuate, given slowing global trade and output.

Protracted geopolitical tensions, tight global financial conditions and global financial market volatility pose risks to the outlook.

We remain watchful of the evolving outlook and the impact of our actions over the last year, Das said. “While we have kept policy rate unchanged, this decision was taken based on our assessment of the macroeconomic and financial conditions with reference to information available up to today.”