Is it a pause? Or is it the end? That was the top-of-the-mind question for most bank and economy analysts after the Reserve Bank of India (RBI)’s Monetary Policy Committee (MPC) surprisingly held off on another increase in the policy rate. The consensus view among analysts is that this could well mark the end of the current rate tightening cycle — it is entirely possible that this view is driven more by hope than reality; RBI governor Shaktikanta Das stressed that the pause was “this meeting only” — and that MPC could start cutting rates from April 2024.
The pause has almost certainly been necessitated by turbulence in the global macroeconomic and financial climate, one that has come about suddenly over the past month and half, but the pause, and, to a larger extent, the governor’s and MPC’s statement, are indicative of RBI’s thinking on inflation, growth, and the financial sector. First, inflation. While it was over 6%, the upper limit of RBI’s tolerance band in February (at 6.44%), it is expected to come down this year. MPC’s resolution expects it to be 5.2% for the entire year (2023-24), and 5.1%, 5.4%, 5.4%, and 5.2% in each of the four quarters. Crude oil prices could play spoiler on this front, as could a lower-than-expected winter crop on account of recent weather events (although this does not appear to be the case). Second, growth. MPC actually marginally increased its growth forecast for 2023-24 from 6.4% to 6.5%, with an estimate of 7.8%, 6.2%, 6.1%, and 5.9% across the four quarters. The likely headwinds to this are all global — geopolitical tensions and a churn in the global financial market. Three, financial stability. Recent developments in US and European banks have sent tremors through the global financial system, raising prospects of a 2008-style global financial crisis. The governor’s reassurance that all is well is welcome in this context — the Indian banking system, Mr Das said, “remains sound and healthy, with strong capital and liquidity positions, improving asset quality better provisioning coverage along with improved profitability”.
All three should cheer the markets. And at a time when rapid rate tightening — the interest rate has gone up by 2.5 percentage points since May — has especially pinched retail borrowers, the pause should provide some relief. Surprise it may be, but RBI’s latest decision is prudently pragmatic.
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