👍👍Let’s hope for a long pause on policy rate hike – The Hindu BusinessLine

Clipped from: https://www.thehindubusinessline.com/opinion/lets-hope-for-a-long-pause-on-policy-rate-hike/article66490952.ece

Given the control over inflation, stability in global commodity prices and easing of geopolitical tensions it may be possible

The RBI might turn a tad more supportive on the liquidity front in the coming months  | Photo Credit: SHASHANK PARADE

The Monetary Policy Committee’s decision to hike the repo rate by another 25 basis points to 6.50 per cent was in line with market expectation. Going ahead, the RBI expects headline CPI inflation to average 5.3 per cent during 2023-24 with relatively moderate volatility. With inflation looking set to soften from its current level and settling within the RBI’s tolerance band, it may not be too surprising if a majority of the MPC members vote against any further hike in the repo rate in the coming months, including in April.

The RBI was proactive and cautious to guard the economy against inflationary spirals and global spill-overs for large part of 2022-23 even if that meant a somewhat slower recovery immediately as it remained committed to financial stability and long-term sustainability of growth. After delivering 250 basis points (bps) of repo rate hike in about nine months, a key question is whether the RBI has reached the terminal rate in the current hiking cycle. While further policy action by the MPC will remain data dependent, taking into account both domestic and global factors, a long pause on the rates front in 2023-24 seems likely, unless there’s some unforeseen shock on the inflation front. Importantly, several key global commodity prices have shown better stability with moderation of supply bottlenecks at the margin, and there’s no escalation in geopolitical tensions.

With the current repo rate of 6.50 per cent, India’s real repo rate will hover at 1.0-1.25 per cent with a meaningful nominal spread of about 1.5 per cent between Indian and US policy rates by Q1 of 2023-24.

In this context, a few important points emerge. First, for the assets book of the banking system that reflects external benchmark linked rates (EBLRs) the pass through is nearly instantaneous and complete. This is a key development and will likely have a bearing on the central bank’s rate action in the current hiking cycle.

Second, given that monetary policy takes effect with a lag, expectations of CPI inflation during mid-2023 is of critical importance; it is expected to soften to close to 5 per cent, barring further unforeseen shocks. Likely softer growth in the global economy in the coming months, no fresh surge in global commodity prices and geopolitical uncertainties, a favourable weather condition back home in India are some of key assumptions behind such forecasts.

Third, of late, the rupee’s trajectory also offered comfort along with better FII flows, partly reflecting some of the recent policy initiatives (example, measured trade restrictions, rupee settlement in external trade, greater flexibility for banks as regards non-resident deposits) apart from measured forex market intervention.

The central bank’s communication on the liquidity front remains important at the current juncture. The widening of the differential between growth rates of credit and deposit has been stark over the past six months. Credit demand improved along with the ongoing recovery in the economy, while deposit growth remains sedate, partly reflecting the sharp reduction in excess systemic liquidity during 2022-23.

However, with inflation under better control, the RBI might turn a tad more supportive on the liquidity front in the coming months with measures such as open market operations or a CRR cut (even if for a finite period) based on prevailing money market and financial market conditions.

The writer is Chief Economist and Head of Research, Bandhan Bank. Views are personal

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