RBI rate hike pause continues; targets 4 per cent inflation, job growth
The RBI extended the pause on rate hikes for the second time. Twice is a trend, but Governor Shaktikanta Das punctured all hopes insisting that the RBI will be done and dusted with tightening only after two clear outcomes — a durable reduction in inflation and a sustainable rise in growth and jobs. Right now, we have neither. Geopolitical tensions, domestic growth-inflation dynamics, and monsoons are adding to the uncertainty. As seen in advanced economies, there’s no easy and quick way to tackle inflation. Countries like Canada and Australia, which paused in the past, resumed rate hikes as inflation remains above target. The RBI, too, is on hold primarily to assess the impact of its 250 basis points rate hike so far. Thursday’s policy tone though well-balanced, is non-committal, retaining policy flexibility to strike back with rate hikes if needed.
With the repo rate at 6.5% and FY24 projected inflation at 5.1%, the real policy rate continues to be positive. In the wake of a greater-than-anticipated decline in inflation in April, markets expected RBI to shift its policy stance to neutral. But the central bank kept it unchanged, thanks to the withdrawal of 2,000 rupee banknotes. Das noted that the average system liquidity was in surplus mode and could increase further as the 2,000 rupee banknotes find their way back into bank vaults. So, RBI retained its withdrawal of accommodation stance until inflation progressively aligns with the 4% target. As for growth, RBI was rather upbeat, revising Q1 estimates upwards to 8% while retaining its annual forecast at 6.5%, perhaps sensing growth pangs during subsequent quarters. Additionally, the governor acknowledged financial stability risks that may unfold due to the unprecedented pace of tightening in global policy rates.
On inflation, RBI lowered FY24 forecasts only marginally to 5.1%. It means the price rise will remain above 4% every month throughout this fiscal. April data confirmed a broad-based price decline, including food and core inflation. Yet, the central bank remains vigilant, perhaps, building in a buffer for any anticipated food price volatility. As Thursday’s policy confirmed, RBI is unlikely to take its foot off the rate hike pedal until it sees a durable reduction in headline inflation closer to 4%, which is unlikely in this fiscal. It means rate cuts are firmly out of the 2023 window.