RBI keeps interest rates on hold in relief for borrowers

This move will come as a relief to borrowers, including those with mortgages, some of whom have seen their repayment periods stretch well into their retirement.

The Monetary Policy Committee (MPC) of the Reserve Bank of India surprised most analysts by deciding to hold back on raising interest rates any further in its first meeting for the fiscal year 2023-24, a move that will come as a relief to borrowers, including those with mortgages, some of whom have seen their repayment periods stretch well into their retirement given the cumulative rate hike of 2.5 percentage points since May 2022.

In RBI’s industrial outlook survey, the cost of raw materials is no longer as big a drag. Within the services outlook survey, selling prices have risen and profit margins have widened after shrinking for a few quarters (MINT)

While the MPC resolution has played this decision as a pause rather than a pivot -- the monetary policy stance is still withdrawal of accommodation -- there are good reasons to see the latest decision as a return to pragmatism rather than placating inflation hawks at the cost of headwinds to the domestic economy, especially at a time when global economic prospects remain bleak. Barring a major upside shock to inflation, most analysts do not expect any more rate hikes this year.

“The MPC decided to keep the policy rate unchanged to assess the progress made so far”, RBI Governor Shaktikanta Das said justifying the MPC’s consensus decision to hold rates unchanged without committing to future course of action.

A lot has changed in the two months since the MPC last met in February . In the domestic economy, headline retail inflation for January and February – both numbers were released after the February meeting of the MPC – surpassed RBI’s upper limit of 6% once again after having gone below it in the months of November and December. This hardened expectations of another rate hike in the April meeting. Only six of the thirty-three economists polled by Bloomberg expected today’s MPC announcement to hold rates unchanged at 6.5%.

Globally, US and European markets have seen a crisis in mid-level to large banks, necessitating government bail outs and forced mergers. Further rate hikes are likely to make things more difficult for banks which have been dealing with erosion on their asset side due to fall in government bond prices triggered by interest rate hikes. Last week, the cartel of oil producing countries took a surprise decision to cut petroleum output, just after energy prices had started moderating. These developments have significantly contaminated the waters vis-à-vis future trajectories of monetary policy and inflation in the global economy.

The World Trade Organisation (WTO) expects global merchandise trade volumes to grow at 1.7% in 2023, even lower than the “smaller than expected” 2.7% growth in 2022. This is bound to hurt India’s growth prospects as well.

“What we are witnessing today is unprecedented uncertainty in geopolitics, economic activity, price pressures and financial markets never seen before”, Governor Das said in his statement.

MPCs bleak assessment of global economic prospects is in sharp contrast to its view about the domestic economy. It has increased the GDP growth forecast for 2023-24 by ten basis points – one basis point is one hundredth of a percentage point – to 6.5%, and expects headline inflation to moderate to 5.2% in 2023-24.

“In this daunting (global) environment, India’s financial sector remains resilient and stable. Overall, the broadening of economic activity; the expected moderation in inflation; the fiscal consolidation with focus on capital spending; the significant narrowing of the current account deficit to more sustainable levels; and the comfortable level of foreign exchange reserves are welcome developments which will further bolster India’s macroeconomic stability” Das said in his statement while reiterating his commitment to stay focused on inflation management.

The decision reflects current reality, the challenges ahead, and also suggests a reversal of the rate cycle later this year, an analyst said.

“Enough (tightening) might just be enough was the overarching message from RBI in the April meeting. We were out of consensus in forecasting that the RBI would pause and keep stance at ‘withdrawal of accommodation’ – which is exactly what was delivered. In our view, this reflects a forward-looking monetary policy that takes into cognizance elevated global growth risks, under-control inflation trajectory, and the need to wait-and-watch and assess the impact of the sharp policy tightening already delivered. However, RBI has kept the door open to further action if macro conditions change, also in line with our expectations. We maintain our view of a policy pause hereon and 75bp of rate cuts, starting from October”, Nomura economist Aurodeep Nandi said in a note.

“Calibrated steps undertaken by RBI will help the growth and consumption at the critical juncture of global headwinds and slackening demand trajectory”, Saket Dalmia, President, PHD Chamber of Commerce and Industry said in a statement.