In the run-up to the monetary policy committee’s April meeting, there was discussion and debate over the committee members’ course of action. Uncertainty over policy stemmed from two factors: One, growing dissent within the committee on the issue of raising interest rates further even as inflationary pressures persist. And two, concerns over financial stability gaining ground over the past few weeks, following the collapse of banks in the US and Europe. Against this backdrop, on Thursday, the MPC voted unanimously to keep the policy repo rate unchanged at 6.5 per cent. This is at odds with the actions taken by the US and European central banks. The MPC’s decision, driven by economic uncertainties and the need to assess the impact of actions taken so far, does not necessarily imply an end to the rate hike cycle. As RBI Governor Shaktikanta Das also said “the decision to pause on the repo rate is for this meeting only,”.
The policy statement as well the governor’s comments highlight the underlying price pressures in the economy. Headline retail inflation, as measured by the consumer price index, has stayed above the upper threshold of the RBI’s inflation targeting framework in January and February, after falling below it in the months before. However, some economists expect inflation to fall sharply in the coming months, largely due to the base effect. The RBI also expects inflation at 5.1 per cent in the first quarter of 2023-24. If it begins to trend lower, it may create the space for an extended pause by the committee as it assesses the impact of the cumulative rate hikes on the broader economy — since the MPC began to hike rates last year, it has raised rates by 250 basis points. For the full year, the central bank now expects inflation to average 5.2 per cent, with the fourth quarter inflation being projected at 5.2 per cent. This would imply a real interest rate of 1.3 per cent.
Alongside, the central bank has also raised its estimate of growth from 6.4 per cent earlier to 6.5 per cent now. While the change is marginal, it suggests an improvement in economic conditions. However, there are downside risks to this forecast. As per other estimates, growth is likely to slow down sharply from 7 per cent in 2022-23. For instance, the World Bank has recently pegged the Indian economy to grow at 6.3 per cent in 2023-24, while others such as Crisil expect it to be lower at 6 per cent, as global growth slows down and the full impact of higher domestic rates is felt across the economy. The scope for further hikes will depend on how the growth-inflation dynamics evolve.
