At the press conference after the policy announcement, RBI Governor Shaktikanta Das said that today’s status “is a pause and not a pivot” because “MPC wanted to assess the impact of the cumulative 250 basis points hike in the policy rates since May last”.
Deputy Governor Michael Patra chipped in to reiterate that today’s pause is “valid only till 10 am on June 8, 2023, when the Governor will announce the next policy”.
Tanvee Gupta-Jain of UBS India and Rahul Bajoria of Barclays India opined that the surprise, unanimous decision of MPC to hold the rate is an indication of “prolonged pause”.
Dharmakriti Joshi, chief economist at Crisil, said RBI will remain on pause as long as inflation does not rise materially above its forecast while Sunil Sinha of India Ratings said the next move would depend on the incoming data.
Barclays now expect RBI to hold rate for the rest of this fiscal, with only a major upside inflation shock likely to stir back the bank into rate action.
Aditi Nayar, the chief economist & head of research at Icra Ratings, said financial stability concerns appear to have pre-empted the move as MPC assesses the impact of its cumulative 250 bps of rate hikes. “But if inflation does not fall in line with MPC assessment for Q1FY24, another hike could be in the offing, especially if the financial stability situation stabilises.” According to Joshi, the next move will be data dependent and that the rates are expected to remain higher for longer as inflation persists above target.
“All this means that while the phase of aggressive rate hikes may be behind us, the after effects on financial conditions, along with any upside to inflation, would be the risks to watch for in the new fiscal year,” he said.
Sinha said the pause perhaps is due to the fact that past rate hikes are still playing out and it now expects retail inflation to come in at 5.2 per cent lower than its earlier forecast of 5.3 per cent and if inflation does not fall, future rate hikes cannot be ruled out.
Joshi noted that in an environment of volatile global developments and tight financial conditions, RBI will remain data-dependent on setting rates.
Rahul Bajoria, head of economics at Barclays India, said RBI surprised markets by holding the rates, citing heightened uncertainty and comfort with the likely inflation trajectory in coming months.
Soumya Kanti Ghosh, group chief economic adviser at State Bank of India, said with the unanimous policy decision, RBI has been able to avoid the trap of falling into the cacophony of voices, which is a characteristic embedded in many prominent central banks of late and indicates the first step towards properly decoupling from the US Federal Reserve.
Although, there are a few divergent paths, the course of monetary policy tightening is clearly not over and the pause indicates that balancing inflation objectives with financial stability is proving to be a delicate task, Ghosh said.