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Well, this was a decision that could have gone either way. So, it was only mildly surprising that the monetary policy committee (MPC) of the Reserve Bank of India chose to pause instead of hiking rates by another 25 basis points.
At the same time, RBI Governor Shaktikanta Das was at pains to emphasise that the fight against inflation is not over yet. Core inflation is still high and no one is under any illusion that inflation will fall soon. In that context, you could call the MPC’s decision pragmatic. Some would perhaps term it confusing.
Still, the case for a pause is quite clear. There are global financial stability concerns and developed market central banks are staying off hikes or going slow. This means that RBI doesn’t quite need to play catch-up to maintain India’s interest differential with developed markets.
Growth concerns abound too as we wait for lagged effect of cumulative rate hikes to show up. In India’s case, this is 250 basis points in 11 months. What’s more, even at a 6.5 percent repo rate, the one-year ahead real repo rate would be 130 bps, given RBI’s projections of consumer price inflation of 5.2 percent for the fourth quarter of the current financial year.
The central bank also expects inflation to soften in the coming months. It has also slightly lowered its forecast for consumer price inflation for FY23-24 to 5.2 percent now from 5.3 percent earlier, citing falling commodity prices and a moderation of inflation expectations of households, among other things.
Finally, there is some comfort in India’s external sector outlook with forex reserves rebounding and the current account deficit projected at manageable levels for FY22-23 and FY23-24.
“On the whole, the RBI’s decision and accompanying hawkish statement seem to be the best course of action for now,” writes my colleague Aparna Iyer. “But will it have the desired effect to temper inflationary expectations and optimism just enough for it to not hurt demand more through more rate hikes?” Click here to find the answers.
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Ravi Krishnan
Moneycontrol Pro
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