After the rate hike in February, we expected a pause from the Reserve Bank of India (RBI) in the April policy, however, the CPI inflation readings of 6 percent+ for two consecutive months suggested that the central bank could go for a final 25 bps hike. And, that was the market consensus, as we approached the MPC meeting.
The RBI, however, surprised the market on April 6 with a pause, and that too, unanimously, even though the inflation outlook remains somewhat uncertain.
The halt in the rate-hike cycle came following the recent global bank failures and their “possible” impact on the financial system and growth.
The RBI has chosen to be cautious and keep an eye on the evolving global situation. Further, as the RBI has been consistently saying, the MPC has already hiked the repo rate by 250 bps in this cycle and would like to ascertain the (lagged) impact of these hikes on the domestic demand and growth conditions before taking any further decisive policy action.
A pause not a pivot
Governor Shaktikanta Das, however, categorically said the pause is only for the current policy and that the MPC's job was not done yet and the war against inflation must continue.
One way to interpret the current policy announcement is that the MPC is keeping the window open to deliver a final 25 bps hike in a subsequent policy, particularly if the inflation trajectory disappoints.
The other way to read it is that the MPC is now turning cautious, given the evolving global situation and is keen to see the past hikes play into the economy rather than going for more hikes.
We think the latter is a more likely scenario and the RBI is getting into an extended pause mode.
Also read: Winning streak for market enters day five, investors cheer surprise RBI pause
The RBI has hiked its growth projection for FY24 marginally by 0.1 percent, starting from Q3 of the fiscal year. It is quite confident about seeing broad-based growth in the economy, even though it remains concerned about the slowing global environment and emerging risks in the global financial system.
The RBI views the domestic urban demand conditions as robust and expects an improvement in rural demand as well, with a better rabi crop.
Mixed signals
On the inflation front, the verdict is mixed. While household inflation expectations are easing and global commodity prices have moderated, food inflation and core inflation remain on the higher side.
Against this backdrop, the RBI has cut the inflation forecast for FY24 by 0.1 percent to 5.2 percent. While it has raised Q1FY24 forecast marginally by 0.1 percent, it has reduced Q4FY24 forecast by 0.4 percent to 5.2 percent, the latter possibly due to base effects.
The recent surge in oil prices (with the OPEC supply cut) and the unseasonal rains are near-term risks to the inflation trajectory.
Das expressed satisfaction on the rupee's stability and the accretion in the forex reserves, which are now back to above $ 600 billion.
Also read: A pause, not a pivot | Shaktikanta Das on MPC's surprise decision
Thus, with RBI staying the course with its “gradual” down-trending inflation forecast and the US dollar showing signs of weakness, there is room to accommodate some slack in the monetary policy.
It is quite likely that RBI will stay in a “pause” mode over the next couple of policy meetings, and prefer the liquidity-management route to tighten rather than hiking rates further.
This stance, however, would be data-dependent, as Das stressed. The global inflationary environment and consequent central bank responses would also be watched closely.
The bond markets had already priced in (domestic yields had dropped over the past few days) a softer “language” from MPC, along with the recent fall in global yields, and after today’s surprise “no-rate-hike” announcement, yields have come off further.
We expect yields to be range-bound, as attention will soon shift to the heavy borrowing programme of the government and its absorption in the markets.
Upside risks to long-term yields are, however, limited, as the rate-hike cycle is getting over. Rate cuts in this calendar year are not yet envisaged, as the RBI continues its fight against inflation and is maintaining tight liquidity conditions.
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