RBI MPC decides to go ahead with a “Hawkish Pause” | The Financial Express

Clipped from: https://www.financialexpress.com/economy/rbi-mpc-decides-to-go-ahead-with-a-hawkish-pause/3036491/

Instead of proceeding with a dovish hike, the RBI surprised the markets with a hawkish pause. Kept rates unchanged and retain the “withdrawal of accommodation” stance. RBI rate hiking cycle has mostly come to an end and RBI to stay on hold for rest of CY 2023.

RBI has increased GDP growth forecast to 6.5% from 6.4%.

By Deepak Agrawal

We had tabled the two options before the MPC was either a “Hawkish Pause” or “Dovish hike” and we were tilted towards the “Dovish hike”. However, the MPC has surprised the market with a “Hawkish pause”. The MPC unanimously decided to keep repo rate unchanged at 6.50%. The monetary policy stance was maintained as “withdrawal of accommodation stance” with 5:1 vote.  RBI Governor was quick to highlight this was not a pivot and that the decision to pause on the repo rate is for this meeting only.

The decision to pause on rates and retain the stance was driven by the following two factors:

• While the recent high frequency indicators suggest some improvement in global economic activity, the outlook is now tempered by additional downside risks from financial stability concerns.
• Headline inflation is moderating but remains well above the targets of central banks.

RBI has increased GDP growth forecast to 6.5% from 6.40%, based on improving prospect for agriculture sector and rural demand, government focus on capital expenditure and capacity utilisation above long-period average and moderating commodity prices should bolster manufacturing and investment activity. 

RBI Governor – while keeping a close watch on global banking sector turmoil highlighted Kautilya’s wisdom, which remains relevant even for today’s world: “In the interests of the prosperity of the country, …..[we] should be diligent in foreseeing the possibility of calamities, try to avert them before they arise, overcome those which happen, remove all obstructions to economic activity…”

RBI has lowered FY 24 inflation projections from 5.30% to 5.20% with risk evenly balanced. Record rabi harvest, correction in wheat prices in March 22, significant moderation in global commodity prices will help in lowering inflation for FY 24. At the same time adverse climate conditions and firm Milk prices can pose upward pressure on inflation.

RBI has increased effective policy rates by 290 bps with policy rates hiked by 250 bps in last 12 months preceded by 40 bps increase due to introduction of Standing Deposit Facility. RBI highlighted the need to evaluate the cumulative impact of these rate hikes. 

Given the 290 bps hike over last 1 year, Real policy rates at 130 bps based on 1 year forward looking inflation, inflation likely to be lower than RBI forecast in first half of FY 2024, tight liquidity would continue to upward pressure on rates, we believe that RBI rate hike cycle has mostly come to an end and RBI to stay hold for rest of CY 2023.

(The author is Deepak Agrawal, CIO – Debt at Kotak Mahindra Asset Management Company. The views and opinion expressed in the column are personal and do not necessarily reflect the opinion of the organisation or the Kotak group or FinancialExpress.com.)