The Reserve Bank of India (RBI) on Wednesday surprised market participants by maintaining the policy stance of withdrawal of accommodation. Most were under the impression that the central bank will dilute its position. However, the RBI is expecting the headline inflation to remain sticky and elevated at least till the second half of the FY24.
The consumer inflation will remain above the ideal level of 4% for the next 12 months and the repo rate still remains accommodative adjusted for inflation, RBI governor Shaktikanta Das said in his statement following the monetary policy committee’s decision to hike the repo rate by 35 bps. The RBI has estimated CPI inflation of 5% in Q1FY24 and 5.4% in Q2FY24.
Four out of six MPC members voted in favour of continuing with the existing policy stance. Shashanka Bhide, Rajiv Ranjan, Michael Patra and Shaktikanta Das voted to remain focused on withdrawal of accommodation, while Ashima Goyal and Jayanth Varma voted against the resolution.
Although the market participants have factored in the 35-bps rate hike, the RBI’s continued stance on withdrawal of accommodation was on unexpected lines, as the stance indicates that the central bank is likely to raise repo rates going ahead to continue its ‘fight against inflation’.
The food inflation is expected to moderate on account of better rabi harvest, and downward correction in global commodity prices, including crude oil. However, there are uncertainities over geopolitical tensions and the movement in the US dollar, which is evenly balancing risks.
This policy stance was considered a tad hawkish by market participants. Avnish Jain, head of fixed income at Canara Robeco Asset Management Company, said: “This led to selling pressure in the equity and G-Sec markets, as investors were expecting a change in stance.”
The 35-bps rate hike is aimed at breaking the core inflation persistence, said Dharmakirti Joshi, chief economist at Crisil Ratings, adding that he expects the central bank to strike again if elevated inflation prolongs. The markets were expecting a slight moderation in the stance, but the continuation of previous stance indicates further action on rate can still happen,” said Ajit Banerjee, CIO, Shriram Life Insurance.
In contrast, the approach of bringing down inflation in a phased manner while supporting growth is a realistic strategy, according to Jyoti Prakash Gadia, MD, Resurgent India, a category-1 merchant bank.
The RBI continues to remain cautious on anchoring inflation expectations, and the policy tone reflected needs to be mindful of future inflationary shocks, Dipanwita Mazumdar, economist at Bank of Baroda, said.