RBI rate hike pause: Why now?

Despite rising concerns about inflation domestically and globally, the Reserve Bank of India's (RBI) Monetary Policy Committee (MPC) has chosen to be cautious by postponing any additional rate hikes.

The MPC's decision comes when inflation has remained strong, with retail-price-based inflation in February at 6.44 per cent, a tad lower than 6.52 per cent in January. Core inflation, excluding food and gasoline prices, has remained continuously above 6 per cent. Despite these circumstances, the MPC unanimously voted to halt any further rate hikes, surprising some analysts who had expected a 25 basis point (bps) increase due to the committee's past concerns over persistently high inflation levels.

RBI Governor making the announcements said, "It would be premature to pause, lest we are caught off-guard and need to catch up later." Observers expressed their curiosity to know what had changed regarding inflation.

One speculated reason is that the RBI wishes to evaluate the global economic situation, specifically regarding the banking crisis and emerging recession concerns. Additionally, the RBI may want to observe the impact of previous rate cuts before making further decisions.

According to a former finance secretary, the government also wants the MPC to prioritise decisions that promote growth. Finance Minister Nirmala Sitharaman recently stated, "With inflation falling on a sustainable basis, the pressure on the RBI and MPC to raise interest rates has now eased." The RBI has raised benchmark interest rates by 225 basis points since May of the previous year to tackle persistently high inflation.

Not the end

The MPC also maintained its "withdrawal of accommodation" stance, underscoring its preparedness to take necessary action. An accommodative monetary policy involves central banks increasing the money supply to stimulate economic growth.

The governor of the Reserve Bank of India emphasised a cautious approach to combating inflation. While the decision to keep the key repo rate unchanged was a one-time event, the governor said that the MPC would not hesitate to intervene in future policy meetings if the situation demanded it. Das reaffirmed that the MPC is still ready to act and will not be shy about doing so at future meetings.

Suman Chowdhury, chief analytical officer, Acuité Ratings said, "We believe that this has mainly been caused by the disruption in the global banking industry, as a result of the collapse of some regional banks in the US, and the potential spread of risks to other regions." Despite this, Chowdhury noted that the RBI's messaging has emphasised that the battle against inflation is far from over and that the MPC stands prepared to raise rates further should inflationary pressures persist.

In his reaction, Sonam Srivastava, the founder of investment advisory firm Wright Research, observed that the RBI's decision to maintain the repo rate unchanged is positive news for the banking and NBFC sectors, as well as for other areas like real estate and infrastructure.

"However, persistent inflation and the global banking crisis are still concerns. From a stock market perspective, the RBI MPC meeting's decision to maintain the repo rate unchanged is expected to create positive momentum, especially for the banking sector. The focus on the 'gradual withdrawal of accommodation' is also reassuring for the market, as it ensures the sustainability of the economic recovery in the long run," Srivastava said.

Nevertheless, Srivastava also warned that the market would closely monitor any future announcements by the governor regarding inflation and global banking instability, as these could impact market momentum.