RBI decides to hold rates again, but in no hurry to declare victory in war on inflation

On Thursday, the central bank's Monetary Policy Committee (MPC) unanimously agreed to extend the pause on the ongoing rate hike cycle. The benchmark repo rate stands at 6.5%, standing deposit facility at 6.25%, marginal standing facility and bank rate 6.75%, even as headline inflation touched a 18-month low of 4.7% in April.

But unlike April policy, where Governor Shaktikanta Das repeatedly stressed about 'pause, not pivot,' Thursday's initial policy statement had no such explicit mention. In contrast, and reading between the lines, one may notice Das dropping the biggest hint regarding the end of the tightening cycle in his closing remarks: It's always the last leg of the journey that's most difficult.

That said, the central bank isn't in a hurry to declare victory over the inflation war, just because retail inflation fell within the upper tolerance band in April and is expected to remain obedient at 4.6% in Q1. In fact, Das emphasized that though price pressures were cooling down, the overall headline number remains high at 5.1% throughout FY24. This is, however, marginally lower than its previous estimate of 5.2%.

Markets were no longer anticipating a rate hike given the certainty to pause, but expectations were high regarding a shift in policy stance. But the MPC in a 5-1 vote split stuck to the status quo, or with the withdrawal of accommodation stance to remain focused on inflation progressively aligning with the 4% target, while supporting growth.

A shift to neutral policy stance would signal that RBI is done hiking rates and given the geopolitical uncertainties and unknown challenges on the price war front, Thursday's decision is much like the moves made by a marathon runner, who slows down as slowly as possible to avoid fallouts, or in monetary policy parlance, a premature liftoff as witnessed elsewhere recently.  

For instance, the Bank of Canada just raised rates to a 22-year high of 4.75% citing inflationary pressures, ending its five-month pause period. Likewise, Australia's central bank, which too paused in April, raised rates both in May and June, with additional warning about further tightening. The US Federal Reserve is expected to end a run of 10 straight rate increases next week while leaving the door open for future rate rises. According to a note by SBI EcoResearch, if 95 economies paused rate hikes, 43 countries continued with the tightening cycle.

In essence, though global food and commodity prices seem to be falling in line, central banks job appears to be far from over. As Das observed, the pace of tightening has slowed, but uncertainty remains on the future trajectory as inflation rules above target in several economies.

While the full fiscal inflation forecasts are moderated to 5.1%, in Q1 it's pegged at 4.6%, Q2 at 5.2%, Q3 at 5.4% and Q4 at 5.2%.  

Meanwhile, RBI's FY24 GDP estimate of 6.5% comes in a unique backdrop. While official statistics showed FY23 real GDP growth rate at 7.2% leaving a cheery start for FY24, the World Bank lowered India's growth projections to 6.3% this fiscal from 6.6% projected earlier.

Weak external demand, geo-economic fragmentation, and protracted geopolitical tensions, however, pose risks to the outlook.