In a surprise move on Thursday, the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) unanimously decided to keep the repo rate unchanged at 6.50% and to remain focused on the withdrawal of accommodation to ensure that inflation progressively aligns with the target, while supporting growth.
Interest rates have been rising continuously since last April until this pause to stem inflation. The RBI said that the MPC would remain watchful and would not hesitate to take further action as may be required in its future meetings.
Addressing a press conference after making his statement on the monetary policy, RBI governor Shaktikanta Das said, “It’s a pause and not a pivot.”
“Our job is not yet finished and the war against inflation has to continue until we see durable decline in inflation closer to the target. We stand ready to act appropriately and in time,” he added.
Assessing cumulative impact
Stating that there has been an effective rate increase of 290 basis points (bps) over the last year, including the SDF of 40 bps already increased, he said this 290 bps increase in fact has translated to a monetary policy transmission by way of increase of over night call rate from the daily average in March last year to the daily average of March this year by 320 bps.
“In last March, the rate was 3.32% and this March, the daily average is 6.52%. So therefore the effective increase is in the order of 320 bps. It is therefore now necessary to access the cumulative impact of our action taken so far,” he said.
Risk of raising rates
Given the overall microeconomic and financial stability, “our priority continues to be price stability”, the RBI governor said.
When The Hindu asked at what point, in terms of data, the RBI would concede that using interest rates alone to tackle inflation has its limit and that raising rates has its own risk to financial stability, Deputy Governor Michael D. Patra said, “In the fight against inflation, interest rate alone has not been used. They have been used in conjunction with supply side measures, because along with the demand pressure, there have been multiple shocks from the supply side... We have an assignment to a regulatory macro prudential policy, and we are assigned to financial stability. So there are separate tools which assure that banks are sufficiently buffered against shocks.”
In his statement, Mr. Das said that protracted geopolitical tensions and the volatility in the global financial markets posed a downside risk to the outlook. Taking various factors into consideration, the RBI has projected real GDP growth for 2023-24 at 6.5%, with Q1 at 7.8%, Q2 at 6.2%, Q3 at 6.1% and Q4 at 5.9%. The risks are evenly balanced.
Taking various factors into account and assuming an annual average crude oil price (Indian basket) of $85 per barrel and a normal monsoon, consumer price index inflation is projected to moderate to 5.2% for 2023-24, with Q1 at 5.1%, Q2 at 5.4%, Q3 at 5.4% and Q4 at 5.2%. The risks are evenly balanced.