RBI keeps rates unchanged, but leaves options open

The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) kept its policy rates unchanged in April, compared with a 25 basis points (bps) hike in the previous policy. However, it maintained its stance of withdrawal of accommodation, and stated its readiness to fight any unexpected rise in inflation. RBI Governor Shaktikanta Das termed today’s action as a “pause, not a pivot.”

The central bank wants to carefully evaluate the consequences of the cumulative 250 bps repo rate hike since May 2022, the fastest pace of hikes in the past decade. The repo rate stands at 6.50%, the highest since February 2019. The real policy rate (repo-inflation), which is still below the pre-pandemic level, is expected to move up as inflation nudges down this fiscal.

Unless inflation rises above than RBI’s forecast, we expect the central bank to pause and watch the impact of past rate hikes on growth and inflation. The RBI will need to closely monitor any spillovers from global market volatility, even as a slowdown in rate hikes by major central banks offers partial relief. As growth slowdown seeps in and inflation moderates, we expect the RBI to cut rates by the end of this fiscal.

Highlights from April monetary policy

• The MPC voted unanimously to keep policy rates unchanged — the repo rate at 6.50%, standing deposit facility at 6.25%, and marginal standing facility at 6.75%
  
• It voted with a 5-1 majority to keep the stance of ‘withdrawal of accommodation’ unchanged from the previous policy
• The MPC cut its projection for consumer price index (CPI)-based inflation to 5.2% from 5.3% for this fiscal
• It raised its projection for growth in real gross domestic production (GDP) by 10 bps to 6.5% for this fiscal