The Reserve Bank of India (RBI) on Thursday kept the policy repo rate unchanged for the second time running and reiterated its intention to align retail inflation closer to the medium-term target of 4 per cent.
At the end of a three-day meeting, the monetary policy committee (MPC) retained the repo rate at 6.5 per cent, meaning there will be no change in the interest rates on homeand auto loans. The markets were expecting a status quoas retail inflation had fallen within the RBI’s target band of 2-6 per cent in March and April.
Economists now expect the central bank will go onan extended pause and a rate cut — barring a surprise inflation spike — could happenby the end of this calendar year or in the first quarter of 2024.
RBI governor Shaktikanta Das said the vigil on inflation would continue, given risks such as El Nino.
“It is not a pivot; I reiterate this is only a pause, which is the second one in two successive reviews. Our future policy actions will purely be dependent on evolving situations. Because even though headline inflation has fallen to within the target band, we need to ensure that it is durable, and therefore there is no room for complacency on inflation,” Das said.
He said MPC wants the headline CPI number to align near the 4-per-cent mark on a sustained and not on a one-off basis.
According to MPC, headline inflation is projected to decline in 2023-24 from its levels in 2022-23 but would stillbe above the target of 4 per cent, necessitating continuous vigil.
The cumulative rate hike of 250 basis points undertaken since May 2022 to February 2023 is transmitting through the economy and its greater impact should contain inflation pressures, in the coming months, according to the policy panel.
The MPC slightly lowered the inflation projection for this fiscal to 5.1 per cent from 5.2 per cent in the previous meeting.
A note from HDFC Bank’s Treasury Economics Research Team said: ``Although, the RBI remained more cautious about the future trajectory of inflation and emphasised that it remains committed to anchoring inflation close to 4 per cent. We think that this resolve to do ‘whatever isnecessary’ to bring inflation down on a sustained basis to the median target is likely to push forward rate cut expectations that some sections ofthe market had started pricing in for as early as October2023’’.
``We think that once the inflation uncertainty moderates and a path towards the 4 per cent target is visible, the RBI could start its rate cut cycle if growth conditions so demand. We do not see this happening before first quarter 2024.’’
Stocks downbeat
The RBI’s cautionary note on inflation did not impress the markets as equity benchmarks Sensex and Nifty surrendered early gains to close with losses on Thursday.
The benchmarks snapped their four-day winning streak as investors pared exposure to auto, bank and IT stocks after the RBI left its key interest rate unchanged.
“Investor sentiment took a downturn following the in-line monetary policy announcement by the RBI, as the market had higher expectationsfor a more optimistic revision in the inflation outlook,taking into account the recent easing of inflation data,” Vinod Nair, head of research at Geojit Financial Services said.
The rupee fell 5 paise to close at 82.57 (provisional) against the dollar on Thursday.
“We expect rupee to trade with a slight positive bias as the RBI governor’s statement did not raise any major red flags for the Indian economy except some worriesover El Nino and its impacton monsoon,” said Anuj Choudhary — research analyst at Sharekhan by BNP Paribas.
