A few years ago, one of the former Reserve Bank of India (RBI) deputy governors during an off-record chat had candidly admitted that the RBI policies are often 50 percent attributed to the Mint Road and rest to the government. It implied that the government’s thinking often weighs on the rate decisions.
Shaktikanta Das, of all governors, is smart enough to get the signal from the North block early. The government, at this juncture, clearly feels that days of over-fixation on inflation fight is over with numbers falling and growth must now get priority.
The language of the RBI policy announcement from Das on February 8 seemed to reflect that.
The 25-bps rate hike announced by Reserve Bank of India (RBI) governor isn’t a surprise, everyone knew a rate hike is going to happen, and it would be a moderate one.
But what is more interesting to note is the commentary on future policy approach. Going by the tone of the language, the rate hike cycle may be over for now. Das left enough hints that inflationary pressures are easing but refused to commit that the RBI’s inflation battle is over.
The RBI’s stated stance of withdrawal from accommodation continues, which means that there is no commitment of a rate reversal as yet. The RBI is in a watchful mode and could act on either side depending on the incoming data.
Das’s reluctance to declare victory of inflation is understandable. After officially admitting the failure to keep inflation within the 6 percent band, the MPC will be careful in letting the guard down on the inflation.
But, growth is clearly back in focus and this was hinted at multiple places. "Inflation has shown signs of moderation and the worst is behind us," Das said.
One shouldn't miss that the former finance secretary quickly added that the reduction in the size of rate hike (from 50 bps top 25 bps) will leave enough room for the RBI to work out its future policy course.
What this essentially mean that the RBI is keeping the powder dry if inflation surprises on the upside but it may not hike rates now.
The RBI’s stance largely agrees with what the government wants — a pro-growth approach from this point. It was just a few days ago, on February 3, when Finance Minister Nirmala Sitharaman suggested that the central bank could perhaps go easy on the rate hikes with inflation falling on a sustainable basis.
The pressure on the MPC to hike interest rates has now eased, the FM said. The tone of the central bank’s policy language suggests that the MPC largely agrees with the FM’s point of view.
There are clear signals from the North Block that growth requires closer attention and the Mint Road cannot ignore that call any longer. The MPC has fixed its focus on growth for too long and back-to-back rate hikes have been too harsh (250 bps since May last year).
While in his speech, there was no commitment from Das that the rate hike cycle is over - Das likes to keep his cards closer to the chest - the MPC may not have any further room for hike rates, particularly after the nudge from the government which is batting for growth.
We might see a pause here onwards.
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