RBI’s policy rate pause is set to continue for a long period

As someone who was clearly in favor of stagnation in April, I see no reason to change my mind in June. The pause by the Reserve Bank of India in April was a most appropriate and commendable decision, demonstrating a more “Fed-independent” monetary policy stance, partly supported by the cushion of reducing trade and current account gaps and the content of a range-bound INR. Is. While it is important for the central bank of an emerging economy to keep pace with the broader global interest rate cycle, one needs to recognize that, for the time being, Western economies are moving away from their respective trend-lines. The divergence in terms of inflation and GDP growth is very high. more pronounced than in India.

Also, in recent months the trajectories of several key macro variables have changed materially in a direction that suggests little chance of any more rate hikes in the current cycle. On the inflation front, RBI’s pause in April was justified by the subsequent data release. Retail (CPI) inflation for April eased to 4.7% from around 6.5% three months ago. While part of the rapid softening reflects the statistical effects of a high base, it is important that headline inflation is comfortably within the central bank’s tolerance band, with relatively low upside risks to the RBI’s CPI forecasts of 5.1% and 5.4%, respectively. Is. , for the first and second quarter of 2023-24. Thus, the current repo rate of 6.5% implies that India’s real policy rate will remain higher by about 1% during this period, while maintaining a policy rate gap of about 1.5% with the US.

One should not forget that Wholesale Price (WPI) inflation has turned negative (-0.9% in April) from 4.7% less than three months ago. It is often felt that WPI inflation in India is unnecessarily under-attained because of the adoption of CPI based inflation targeting despite the rich information content of the former and the main asset that is often displayed on CPI inflation.

In the absence of much debate on RBI’s possible rate action, the focus of the market in the June meeting will be on: (a) the stance of policy and commentary, in general, (b) guidance on liquidity, (c) any change in growth or inflation forecast, and (d) operational guidelines, if any.

I expect the RBI to continue with the current policy stance of “withdrawing accommodation” with an emphasis on continued monitoring of inflation and no complacency on growth recovery. No material revision is expected in the RBI’s growth and inflation forecasts. Of late, there has been some easing of banking system liquidity for some time, partly reflecting RBI’s higher-than-expected surplus transfer to the government and the large-scale accumulation of INR 2000 notes in bank deposits. has increased substantially. Lastly, there is an expectation that RBI fixes some operational guidelines related to CRR maintenance of banks.

Finally, the central bank will likely continue to reiterate the message of “only a pause and not a pivot” in June as well. The tone of this cautious guidance is that the central bank is in no rush to relax and may even refrain from hiking. again, if necessary. While the central bank wishes to point out that future policy action will depend on the data, after the pause in April, the bar has turned high for further hike in the repo rate, especially given the trends in various macro parameters in both the countries. and abroad. Thus, in short, a prolonged pause on policy rates, possibly beyond the current calendar year, is my baseline expectation and the pivot may still be several quarters away.

The writer is chief economist and head of research at Bandhan Bank. Thoughts are personal.

Updated: June 05, 2023, 10:15 PM IST