The Reserve Bank of India (RBI) on Thursday said further rate hikes were not off the table going ahead even as the repo rate was left unchanged at 6.50% for now.
The central bank has maintained its ‘withdrawal of accommodation’ stance.“The MPC remains watchful and will not hesitate to take further action in its future meetings as may be necessary. The job is not yet finished. Given that there is overall macroeconomic and financial stability, our priority continues to be price stability,” RBI governor Shaktikanta Das said at the post-policy press conference.
Since May 2022, the RBI has hiked the repo rate by 250 basis points (bps) in a bid to remove excess liquidity from the financial system and keep inflation under check. In April 2022, it had introduced the standing deposit facility at 40 bps higher than the fixed-rate reverse repo.
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Simultaneously, the overnight call rates have risen by 320 basis points since March 2022, indicating the transmission of the monetary policy rate. “Monetary policy is always forward looking. We are watchful of the impact of the action taken so far. There are so many other external developments also taking place – with regard to inflation and growth, and so many other things. We will be watchful of the overall situation. We will take further action whenever we think appropriate,” Das said.
The central bank’s retail inflation target is at 4% in the medium-term with a 2% band on either side.
“The MPC is working on a premise that base effect will lower inflation in coming months but has ring-fenced view that the no-rate-change policy holds only for this policy. Hence, further rate hikes have not been ruled out if inflation path changes. As a whole, a very balanced and nuanced view has been taken which ensures stability in this status quo situation while not committing to the future path that will be data driven,” Madan Sabnavis, chief economist, Bank of Baroda, said.
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While the RBI has made it clear that today’s move must be interpreted as a “pause” and not a “pivot”, economists believe that the writing is on the wall as far as this rate cycle is concerned. “With the governor stating that today’s pause on policy rates is for this policy only, it has the elbow room to act on rates if inflation readings surprise on the upside. Basis the current growth-inflation dynamics and the global backdrop, the repo rate is likely to peak out at 6.50-6.75% with a possibility of a final 25 bps to be delivered in 1H FY24 (April-September),” Achala Jethmalani, economist at RBL Bank, said.
With the central bank expecting inflation to ease to 5.2% in January-March 2024 from 6.4% in February 2023, it may also opt to not hike the rate further in 2023, say experts. “With inflation likely to trend downwards from the current level, it is unlikely that RBI will have to hike rates further in 2023. We expect a status quo in policy rate in 2023,” Rajani Sinha, chief economist, CareEdge, said.