RBI unexpectedly kept the repo rate unchanged on Thursday at 6.5 per cent, to take a pause and assess the impact of the series of policy rate hikes since May 2022. RBI Governor Shaktikanta Das on Thursday announced that the RBI MPC has unanimously decided to keep the policy repo rate unchanged at 6.5 percent. “The repo rate has been maintained so that the MPC can assess the progress made so far, while closely monitoring the domestic and global situations,” he said. This is against the Reuters poll that maintained that RBI will raise its main interest rate by 25 basis points on April 6 and then pause for the rest of the year.
However, the RBI MPC left the door open for future rate actions. “The MPC will not hesitate to raise the repo rate in future meetings,” said Shaktikanta Das. The central bank had already increased the repo rate by a total of 250 bps since May 2022 in order to contain inflation through which has remained above the RBI’s threshold of 6 per cent.
Shaktikanta Das also maintained that when the RBI started the rate cut cycle in 2019, the CPI was around 2 per cent and the repo rate was 6.5 per cent. “However, inflation is 6.4 per cent currently while the repo rate is 6.5 per cent. “Given its current level, our policy can still be seen as accommodative. This is why the RBI MPC decided to maintain a withdrawal of accommodation stance,” he added.
Why the repo rate remained unchanged
In his speech, the RBI governor said that the headline inflation is projected to moderate in 2023-24. “The monetary policy actions taken since May 2022 are still working through the system. Accordingly, the MPC decided to keep the policy rate unchanged to assess the progress made so far, while closely monitoring the evolving inflation outlook,” he said while maintaining that the MPC will not hesitate to take further action in its future meetings, if need be.
The RBI MPC has, so far, increased the policy repo rate cumulatively by 250 bps in the last 11 months starting May 2022 which was preceded by the introduction of the Standing Deposit Facility (SDF) at a rate 40 bps higher than the fixed rate reverse repo. This makes the effective rate hike since April last year at 290 bps. Das said that it is now necessary to evaluate the cumulative impact of these rate hikes, which has led to the MPC to keep the rate unchanged at 6.5 per cent. “We have always been very watchful and have adopted a calibrated and balanced approach and will continue to do so,” he said.
Meanwhile, Suvodeep Rakshit, Senior Economist, Kotak Institutional Equities, said, “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 about inflation, especially core inflation and remains focused on reaching the 4 per cent target over the medium term. The RBI remains comfortably on the growth front, for now.” He added that the scope for further hikes is minted given the growth-inflation outlook and impact of the past rate hikes on the same.
Nilesh Shah, MD, Kotak Mahindra Asset management Company Ltd, added, “The RBI will watch developments and data before taking the next call. The market expects the RBI to fetch maximum run and win the match on inflation and growth, no matter which direction they hit the ball.”