Economists welcome RBI’s move to keep repo rate unchanged but warn of another rate hike

Aditi Nayar, chief economist and head (research & outreach) at ICRA, said, “Financial stability concerns appear to have pre-empted a pause as the MPC assesses the impact of its cumulative 250 bps of rate hikes.”

Srikanth Subramanian, CEO of Kotak Cherry, said, “RBI in a surprise move kept repo rates unchanged at 6.5 per cent, though stating that they will continue monitoring the evolving situation around inflation and banking sector turmoil in developing countries.”

The RBI has hiked its repo rate by 250 basis points (bps) since May last year. At 6.50 per cent, the repo rate is at its highest level since February 2019.

“Governor Das in his post-policy comments reemphasised on RBI’s CPI target of 4% and clarified that today’s action should be seen as a pause, not a pivot. This keeps the door open for further policy actions if warranted while also preventing financial conditions from easing prematurely thus hampering their fight against inflation. Given that overnight rate has risen by approximately 320 bps over the past year, RBI likely wants to better assess the lagged impact of past monetary tightening measures before acting any further, thus avoiding over-tightening risk,” said Piyush Baranwal, senior fund manager at WhiteOak Capital Asset Management.

Suvodeep Rakshit, senior economist at Kotak Institutional Equities, said that the RBI’s policy to keep the rate unchanged is a “hawkish pause,” as the central bank was concerned about the uncertainties in the global financial markets.

“The decision to pause at 6.5 per cent was a positive surprise. We believe the RBI is concerned about the uncertainty from global financial markets and the pause is reflective of this concern. We view 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,” Rakshit said.

‘Just a pause’

RBI Governor Das, while interacting with reporters after announcing the monetary policy statement, said that the decision to keep the rates unchanged should be seen as “a pause, not a pivot.” The committee would not hesitate to take further action as may be required in its future meetings, he said.

“If inflation does not fall in line with the MPC’s assessment for Q1 FY2024, another hike could be in the offing, especially if the financial stability situation stabilises,” Aditi Nayar said.

The RBI’s MPC marginally lowered the retail inflation forecast to 5.2 per cent for FY 2023-24, from 5.3 per cent announced in the February policy. The MPC has projected inflation at 5.1 per cent for the first quarter of the current financial year, followed by 5.4 per cent in the second and third quarters and 5.2 per cent in the fourth quarter.

“In a surprise move the RBI decided to keep the policy repo rate unchanged at 6.5 per cent but with a caveat that RBI will be ready to act in future if the situation desires. So this is just a pause and the RBI is open to hikes if the environment changes,” said Sharad Chandra Shukla, director at Mehta Equities Ltd.

India’s retail inflation has stayed above the RBI’s tolerance limit for two consecutive months. While in January, the CPI inflation was at a three-month high of 6.52 per cent, in February it eased to 6.44 per cent. The rise in inflation has majorly been contributed by the increase in rates of cereal, milk and food items.

Kotak Cherry CEO Subramanian said, “Although inflation globally and in India have moderated from decadal high levels seen last year, it will be important to see what the inflation numbers come out in the next few months following the surge in crude oil prices seen post announcement of crude production cuts announced by OPEC+ countries.”

Kotak Institutional Equities’ Rakshit said the RBI remained comfortably on the growth front, for now. “We believe the risks to this outlook are skewed towards the downside. We expect the RBI MPC to remain on an extended pause. Scope for further hikes is limited given our growth-inflation outlook and impact of the past rate hikes on the same,” he added.