Pause, not pivot, says Das after RBI holds policy rate at 6.5%

CPI inflation projected to moderate to 5.2%, real GDP growth estimated at 6.5% for 2023-24

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 6.5%, citing global financial stability concerns as a key factor in the decision. Five of the MPC’s six members also voted to keep policy focused on the withdrawal of accommodation to ensure that inflation progressively aligns with the target, while supporting growth.

The MPC has raised interest rates continuously since May to stem inflation. The RBI said it would remain watchful and would not hesitate to take further action as may be required.

“It’s a pause and not a pivot,” RBI Governor Shaktikanta Das said at a press conference.

“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.

Stating that there had been an effective rate increase of 290 basis points (bps) over the last year, including the introduction of the SDF at 40 bps higher than the then prevailing fixed reverse repo rate, he said this 290 bps increase had in fact translated to monetary policy transmission by way of an increase in the overnight 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.

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 limits and that raising rates has its own risks for 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.”