The consumer price index (CPI)-based inflation came at 6.44 percent in February, a tad down compared with 6.52 percent in January. This marks the second consecutive month of inflation staying above the 6 percent upper-band for the second consecutive month.
Most economists expect another 25 basis points (bps) rate hike in the April round of the monetary policy review. The Reserve Bank of India (RBI) has increased the policy rates by 250 basis points (bps) since May last year taking the policy repo rate to 6.5 percent.
What will be the next rate move of the Monetary Policy Committee (MPC)?
A section of economists and MPC members believe that it’s time the rate-setting panel takes a pause and waits for the results of the past rate hikes to play out.
For instance, Soumya Kanti Ghosh, Group Chief Economic Adviser, SBI, thinks the time has come for the central bank to take a pause on rate hikes. “The 250 basis point rate hike has been correctly frontloaded even though the time may have now come for RBI to pause and rethink the impact of past rate hikes,” said Ghosh in his note on Tuesday.
Ghosh cites data to argue that demand for housing loans at the lower end of the strata has been hit post the previous rate increases. “The proportion of home loans up to Rs 30 lakh in total loans disbursed has declined to 45 percent during January-February 2023 from around 60 percent of the total disbursals in June 2022 quarter,” Ghosh wrote in his note on March 14.
“Moreover, if we look at above Rs 50 lakh loans, their share has increased from 15 percent to ~25 percent of the fresh housing loans during this fiscal,” Ghosh added.
This is not an isolated view. Nomura Research, too, is betting on a pause in April citing previous monetary policy decisions, concerning economic and financial conditions in the US and a less robust domestic demand forecast for the fiscal 20-2024.
MPC divided
Within the MPC, two members—Jayanth Varma and Ashima Goyal—have been pitching for a pause.
But these voices are a minority. The majority in the MPC and the economist community believe that the RBI’s inflation fight isn’t over yet. This section of experts highlights persistently high core inflation (non-food, non-oil component) and stubbornness in the overall number in recent months.
But against these two, the other four lobbied for a 25 bps rate hike and probably more hikes ahead. Their common stance can be summarised in deputy governor Michael Patra’s comment.
“The MPC has to remain committed to its primary mandate. The recent experience has amply demonstrated that low and stable inflation is the credible nominal anchor for a reinvigoration of growth. Moving the policy rate into the restrictive territory at a resolute pace has provided the headroom to continue to moderate the order of rate increases,” Patra said.
RBI Governor Shaktikanta Das’ statement too reflects extreme caution. “It would be premature to pause, lest we are caught off-guard and need to do a catching up later,” Das said in the minutes of the February policy meeting, where MPC hiked the rate by 25 basis points.
This clearly indicates the RBI thinks it is too early to lower the guard.
Between the last monetary and the April one, the big event is the still evolving US banking crisis. One fallout of the crisis will be a likely change of pace in the US Fed’s rate hike approach (lower than expected rate hikes ahead, as per the majority of analysts), which could influence the monetary policies of emerging markets including India.
While it is hard to guess the April policy outcome, the odds point to either one final round of a small rate hike or a pause.
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