Longish pause in rate hike from April policy seems imminent but possibility of cuts later this year looks extremely unlikely

RBI Monetary Policy

Unmesh Kulkarni – Managing Director Senior Advisor, Julius Baer India

The Monetary Policy Committee (MPC) has raised policy rates by 25 bps, taking the repo rate to 6.5 percent. This was pretty much in line with our expectations of a “reduced” quantum of hike. The MPC also continued with its stance of “withdrawal of accommodation”, while market expectations were divided on the stance, with a certain section of the market expecting the MPC to change the stance to neutral.

The rate action of 25 bps was widely expected; however, unlike market expectations, the RBI Governor did not give out a dovish message in his speech.

Some key takeaways from the RBI Governor’s statement:

- Growth forecasts have been raised substantially, and the MPC finds the Indian economy quite resilient. Although the MPC expects growth to moderate through FY 2024, along with the expected slowdown in the global economy, its forecasts for domestic GDP growth are now much higher (particularly for Q1FY24) than what it was expecting in its previous assessment.

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Unmesh Kulkarni

Managing Director Senior Advisor|Julius Baer India

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- CPI inflation forecasts have been moderated marginally, but remain high. In fact, while the RBI is expecting the CPI to moderate further, its forecasts are still above 5 percent - way above its 4 percent target, which the RBI Governor reiterated in his speech. Besides, the Governor emphasized the need to see a decisive moderation in the inflation trajectory, and also expressed the MPC’s continued concern around the high and sticky (above 6 percent) core CPI inflation.

Also read: What a 25 bps hike means for an average Indian's home-buying dreams

- As far as the rate stance is concerned, the MPC is of the view that further calibrated monetary policy action is warranted to keep inflation expectations anchored, breakcore inflation persistence and thereby strengthen medium-term growth prospects.

- With respect to the liquidity stance, the Governor indicated that the RBI will be flexible and responsive, and will conduct operations on either side of the LAF (liquidity adjustment facility i.e., suck out liquidity / infuse liquidity, depending on the evolving liquidity situation). The MPC didn’t see any overwhelming reason to change the liquidity stance to neutral, from the current stance of “withdrawal of accommodation”.

Looking forward, the RBI’s monetary policy path will be clearly guided by the evolving CPI prints, both headline, and Core, as the MPC continues to see inflation as a major risk to its growth outlook. Through the “non-dovish to mildly hawkish” messaging in the policy statement, the RBI MPC has preferred to keep the door open for another rate hike (possible 25 bps hike). However, this is likely to be a lower probability event, which may materialize in case the recent downward inflation trajectory is disturbed by global uncertainties.

Also read: MPC plays it safe, more rate hikes coming?

At the current juncture, when the headline CPI is already within the MPC's target range and expected to trend downwards, a longish pause, starting from the April policy, seems imminent. Given that RBI is not concerned about growth at this stage (and has actually raised growth forecasts), the possibility of rate cuts later this year, however, looks extremely unlikely.

Investors were disappointed with returns from fixed income in CY 2022, while the rate hike cycle was in full swing. In the near-term (current quarter), money markets may continue to be a bit tight; however, FY23-24 is likely to be a good year for fixed-income investors, with the rate hike cycle coming to an end and inflation and interest rates have peaked out.

Also read: What should debt fund investors do as RBI hikes repo rate?

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