Focus back on growth as RBI pauses rate hike
As Keynes once said, it’s the unexpected, always. As against a consensus estimate of a 25 bps repo rate hike on Thursday, the RBI decided to pause. In a further comforting development, it moderately lowered FY24 inflation estimates to 5.2%, yet, Governor Shaktikanta Das stressed that it was a temporary pause and not a pivot, where rate hikes end and rate cuts begin (and vice versa).
Markets saw April’s much-anticipated 25 bps rate hike as a parting shot to the ongoing tightening cycle. But the surprise moves to pause, and Das’ repeated reminders about RBI’s unfinished inflation fight eliminate that finality and lend uncertainty to the next course of monetary policy actions.
Further, in a 5-1 split vote, RBI agreed to continue with its withdrawal of accommodation stance, allowing itself the flexibility to move in whichever direction incoming data and global developments take.
Several reasons influenced the rate pause. The government borrowing programme, which has just begun, needs support, with the 10-year yield already under pressure at 7.2–7.3%.
RBI must also assess the impact of 2.9% effective rate hikes delivered so far. As Das reiterated, the increase in overnight call money rates stood even higher at 3.2%.
These are rates at which banks and financial institutions borrow and lend, and it is also the operating target for monetary policy.
Lastly, interest rate transmission is incomplete, yet rates have already touched FY19 levels. Given borrowers are seeing higher payouts amid price rise, it is prudent to pause and stimulate credit flow.
Among all, a rate pause hints at the central bank’s focus on handholding growth. Any further hikes and sustained inflation could reduce purchasing power and dampen demand.
So, some believe it is appropriate to prioritise growth and financial stability and not be influenced by other global central bank decisions or remain under stress due to supply-side inflation.
By charting its own policy course, RBI has done a fine balancing act once again. But the big question is if we are done with the rate hikes. Bets are already on that it will be an extended pause or an end of the rate hike cycle, although Das remains reluctant to strike off rate hikes from his to-do list.
It means predicting the June policy outcome, whether a hike, cut, or pause is down to the wire.