Banking Central | What will be the MPC’s decision on rates?

RBI Governor Shaktikanta Das

The first meeting of the Monetary Policy Committee (MPC) of the financial year 2023-24 is scheduled to be held on April 4-6.

What will the outcome as far as the rate decision is concerned? The consensus among economists is that the MPC will hike rates by a quarter point to 6.75 percent and call it the end of current rate hike cycle. The other view is that there won’t be a rate hike on Thursday and the MPC will finally settle for a pause.

In my view, there is no strong reason for a pause on Thursday. Consider the following reasons:

One, there is no evidence to suggest that the rate setting panel has emerged victorious in its battle on inflation yet. The retail inflation stood at 6.44 percent in February, down from 6.52 percent in January but stayed above the central bank’s comfort level of 6 percent.

Going by the minutes of the last MPC meeting, there is a reiteration that it won't let go of the inflation fight till there is evidence of sustainable fall, which hasn’t happened yet.

Two, the core inflation remains high. Core inflation, non-food, non-oil part of the overall inflation, remains sticky above 6 percent. Majority of the MPC members have been highlighting persistence of core inflation at a high level is a crucial concern at this stage. That hasn’t changed till now.

Three, cues from global central banks, including the US Federal Reserve, remains clearly in favour of a rate hike at this stage. Even amid a banking crisis and calls for an urgent rate course reversal, the Fed remained on course to hike rates. Globally, central banks are more concerned about a resurgence in inflation, The RBI is no exception.

Four, There is no evidence to suggest that inflation is unlikely to come back to the RBI’ comfort zone (below 6 percent) even in March. Particularly, the core inflation remains a larger worry. Till the time inflation numbers ease to the desired level, the central bank will not be comfortable to pause.

Five,  The MPC is under pressure in meeting its primary mandate as inflation remaining above 6 percent level consistently. Under rules, the MPC will need to submit a report to the government if inflation stays above 6 percent for three quarters in a row, which happened last year. The rate-panel wouldn’t want to end up in a similar situation again.

The call for a rate pause from MPC members in last meeting—Jayanth Varma and Ashima Goyal—is unlikely to be heard this time.

Banking Central is a weekly column that keeps a close watch and connects the dots about the sector's most important events for readers.