MPC opts for hawkish pause, focused on 4% inflation target
Reacting to RBI‘s Monetary Policy Committee (MPC) to maintain the status quo as regards the repo rate, economists said that the Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) will not revise downwards the repo rate anytime soon and that too not ahead of the US Federal Reserve.
“Amid a volatile global economic scenario and lingering risks to domestic inflation, it is prudent that the RBI has followed a wait-and-watch strategy,” Rajani Sinha, Chief Economist, CARE Ratings said.
While the RBI has marginally lowered the CPI inflation projection for FY24 to 5.1 percent, it has emphasized on the inflationary risks. The policy stance on ‘withdrawal of accommodation’ is reflective of RBI’s guarded approach towards inflation as it reiterated that inflation remains above target and remaining within the tolerance band is not enough, Sinha said.
“Going ahead, with the domestic growth holding up well, we have raised our GDP growth projection to 6.5 percent for FY24 (from previous projection of 6.1 percent),” Sinha remarked.
“With concerns on growth front abating and CPI inflation likely to remain above the 4 percent target, we expect a status quo on the policy rates in 2023,” Sinha added.
RBI Governor Shaktikanta Das has softly recognised that more financial stability risks may unfold with the unprecedented pace of tightening in global policy rates, said Madhavi Arora, Lead Economist, Emkay Global Financial Services said.
According to Arora, in this fast evolving world, it is unlikely the RBI would be too adventurous on either side of rate actions, and is unlikely to precede the Federal Reserve in reversing its course of rate hikes in the future.
“We do not see any rate reversal by the RBI in FY24,” Arora added.
While the MPC’s decision to maintain the status quo was expected, Aalesh Avlani Founder, Credit Wise Capital said a slightly aggressive stance of reducing the rate would have been appreciated to fuel growth.
After a cumulative hike of 250 basis points (bps) last fiscal, the central bank has moved to the sidelines to see their impact on growth and inflation play out this fiscal, Dharmakirti Joshi, Chief Economist, CRISIL said.
The central bank remains vigilant of global volatility. Even as central banks in major advanced economies have reduced the pace of rate hikes, inflation rules above their target and faces upside risks from tight labour market conditions.
“We expect RBI to maintain status quo on rates this fiscal and initiate cuts in the January-March quarter of 2024,” Joshi said.
“While the continuation of the RBI’s policy stance is somewhat disappointing, the central bank’s cautious approach in light of upside risks, such as the potential impact of El Nino on India’s monsoon and the continuation of monetary tightening by the world’s major central banks, appears justified and well-articulated. Therefore, we anticipate that the monetary policy announcement will have no effect on the financial markets,” opined Sujan Hajra, Chief Economist and Executive Director, Anand Rathi Shares and Stock Brokers
[With Inputs from IANS]
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