The Reserve Bank of India (RBI) on Wednesday surprised the markets with the continuation of its ‘withdrawal of accommodation’ stance, as core inflation continues to remain sticky. The stance indicates that there will be scope for further increase in repo rates depending on upcoming inflation data.
There is a need for further calibrated monetary policy action to keep inflation expectations anchored and break the persistence of core inflation, RBI governor Shaktikanta Das said in his statement after the meeting. He also highlighted that India is facing inflationary risks arising out of overlapping shocks at a global level, including volatile financial markets, geopolitical hostilities and sovereign debt distress.
While core inflation is declining, it is not happening at a pace the RBI is expecting, deputy governor Michael Patra said. However, this does not mean that the tighter monetary policy will continue going ahead as both headline and core inflation numbers are moderating, he said in the post-policy press conference. The Indian economy is in an extraordinary situation, which was not witnessed in the past, and the RBI expects core inflation to reflect those concerns. However, inflation will moderate if monetary policy remains resolute on its course, he added.
“Look for decisive moderation in inflation and propensity to align with the target,” Patra said.
MPC members Shashanka Bhide, Rajiv Ranjan, Michael Patra and Shaktikanta Das voted in favour of remaining focused on withdrawal of accommodation, while Jayanth Varma and Ashima Goyal voted against the resolution.
The market participants had factored in a 25-basis-point (bps) increase in the policy repo rates to 6.5%, but were expecting the stance to change from withdrawal of accommodation to ‘neutral’. The continuation of the stance was slightly unexpected, which indicates that any further rate hikes cannot be ruled out, according to Ajit Banerjee, CIO, Shriram Life Insurance.
“The major takeaway is that there will be a prolonged pause for sure before any further action is taken by the RBI and that action will be data driven. Presently, it looks like that there is an upside risk to the inflation number and hence a rate hike could be thought of later,” Madan Sabnavis, chief economist, Bank of Baroda, said.
The MPC’s caution on inflation is signalled by its unchanged stance, which might have arisen from higher inflation projection for H2FY24, according to Aditi Nayar, chief economist, Icra Ratings. The RBI has projected the CPI inflation at 5.4% in Q3FY24 and 5.6% in Q4FY24.
“The policy is focused more on managing inflation, even though the recent retail inflation readings are showing signs of moderation. The RBI has given considerable emphasis on high core inflation pressures and assumes it as a major risk to the growth outlook,” Atul Goel, MD & CEO of Punjab National Bank, said.
The MPC, in maintaining its policy stance, has also signalled that absorption of excess liquidity remains in focus to nudge transmission of rate hikes, ratings agency Crisil said.