Banking Central: Will RBI’s Monetary Policy Committee regret its early pause?

RBI Governor Shaktikanta Das

On April 6, the Reserve Bank of India's (RBI) monetary policy committee (MPC) surprised most economists with a pause. Analysts were expecting a 25 bps rate hike as inflation has stayed above the 6 percent mark for two consecutive months and because of the sticky nature of core inflation.

The unexpected pause, however, came with a word of caution. RBI Governor Shaktikanta Das made it clear that the RBI could get back on the rate hike path in future policy meetings if inflation was on the higher side.

The MPC’s decision to pause wasn’t really convincing for many. Until the last policy, majority of the members had spent considerable time arguing over why a premature pause could spoil the hard-won gains of a prolonged inflation battle. As this writer highlighted in an earlier column, in the February policy meeting, Das had said it would be “premature to pause, lest we are caught off-guard and need to do a catching up later”. Retail price-based inflation has, so far, remained in the red zone — 6.44 percent in February and 6.52 percent in January. Core inflation, which is the non-food and non-oil part of inflation, too, has stubbornly remained above 6 percent for consecutive months.

Banking Central

In the April review, RBI kept both inflation and growth projections largely at the same level. The stance — withdrawal of accommodation — continues. The persistently high inflation concerns remain. Despite all this, surprisingly, the rate panel chose to hit pause, leaving the world to wonder about the sudden reversal in approach. We will get more insights into what transpired at the policy meeting when the minutes of the meeting come out.

What next?

It is clear that the MPC wanted to shift course in favour of growth. Else, why would it risk a pause when inflation dangers persist? Despite caution from the governor, there is a growing consensus that the MPC may stay on a longer pause and will act only if inflation surprises on the higher side. But, CPI-based inflation has already been beyond the upper tolerance level for a while now.

It all depends on how the inflation trajectory will pan out ahead. The RBI has got projections wrong in the past. What is the level the MPC is comfortable with?

The RBI expects inflation to average at 5.2 per cent in FY24. The assumption is that inflation will start easing in the period ahead to stay below 6 percent. But what if there are fresh headwinds on inflation and it stays elevated? That would put the panel in an embarrassing position and questions will emerge on the early pause. Remember, crude is inching up following surprise production cuts by major producers.

It is certain that the MPC will make every attempt to end the rate hike cycle at this point. However, a below-normal monsoon amid an El Nino threat can push up prices of essential food items. Coupled with the risks from global factors, the MPC could be pushed back to the point where it began. Else, if all goes according to plan, it is going to be a longer pause followed by rate cuts later this year.