No change: MPC presses 'pause' after hiking rate by 250 bps since May 2022

RBI governor makes it clear that if required, MPC could hike rates in future meetings

In a surprise move, the six-member Monetary Policy Committee (MPC) on Thursday decided to keep the policy rate unchanged at 6.5 per cent. The pause in repo rate hike comes after six hikes in a row.

Since May 2022, the MPC has increased the policy rate by 250 basis points (bps). These repo rate hikes were preceded by the introduction of a standing deposit facility (SDF) at 40 bps higher than the fixed rate reverse repo. Hence, the effective rate hike since April last year has been 290 bps. 

The decision to press the pause button was taken unanimously by the rate-setting body, which has three external members and three members from within the Reserve Bank of India (RBI).

Consequent to the repo rate remaining unchanged at 6.5 per cent, the SDF rate will remain unchanged at 6.25 per cent, and the marginal standing facility (MSF) rate and the bank rate at 6.75 per cent.

The MPC also decided, by a five to one majority, to remain focused on the withdrawal of accommodation to ensure that inflation progressively aligns with the target, while supporting growth.

In his statement, RBI Governor Shaktikanta Das said, “Economic activity remains resilient and real gross domestic product (GDP) growth is expected to have been 7 per cent in 2022-23. Consumer price inflation (CPI) has, however, increased since December 2022, driven by price pressures on cereals, milks, and fruits.”

He added, “Core inflation remains elevated. Looking ahead, headline inflation is projected to moderate in 2023-24. The monetary policy actions taken since May 2022 are still working through the system. Accordingly, the MPC decided to keep the policy rate unchanged to assess the progress made so far, while closely monitoring and evolving the inflation outlook.”

Das also said that the “MPC will not hesitate to take further action as may be required in its future meetings.”

In a poll conducted by Business Standard, the majority of economists had predicted that the MPC might raise rates by 25 bps, given that the inflation print in January and February had exceeded its inflation target.

Eight of the 10 respondents had said the MPC was expected to lift the policy repo rate by 25 bps to 6.75 per cent in the first bimonthly review for the financial year 2023-24. However, the rate-setting body decided to press pause instead.

“When we started the rate-cut cycle in February 2019 to provide support to growth, the CPI inflation was around 2 per cent and the policy repo rate was 6.50 per cent. Now, the policy rate is 6.50 per cent but inflation is 6.4 per cent (February 2023),” Das said in his statement. “Overall, inflation is above the target and given its current level, the present policy rate can still be regarded as accommodative. Hence, the MPC decided to remain focused on withdrawal of accommodation.”

Further, the RBI said that India’s real GDP growth for 2023-24 is projected at 6.5 per cent, with Q1 at 7.8 per cent; Q2 at 6.2 per cent; Q3 at 6.1 per cent; and Q4 at 5.9 per cent, with risks evenly balanced.

And, the CPI inflation is projected to moderate to 5.2 per cent for 2023-24; with Q1 at 5.1 per cent; Q2 at 5.4 per cent; Q3 at 5.4 per cent; and Q4 at 5.2 per cent. These figures are projected by taking into account these factors and assuming an annual average crude oil price (Indian basket) of $85 per barrel and a normal monsoon.

According to Madan Sabnavis, chief economist, Bank of Baroda, the credit policy announced today had two surprises. First the repo rate has been unchanged while the market had taken it for granted that there would be a 25 bps hike. However, the caveat is that it should not be interpreted as being the end of the rate-hike cycle and there is scope for further hikes, if warranted.

“Therefore, the status quo in repo rate cannot be interpreted as being a 'pause from here on'. The stance has been unchanged at withdrawal of accommodation. And the RBI has drawn parallels of repo rate at 6.5 per cent today with 2019, when it was at the same level but when inflation was less than 3 per cent (inflation today is at 6.4 per cent). Therefore, there is still a lot of accommodation in the policy to warrant a withdrawal,” he said.

“The second surprise is that the RBI has marginally raised the GDP forecast to 6.5 per cent from 6.4 per cent earlier and inflation to 5.2 per cent from 5.3 per cent,” he said. “While the numbers may not really be significant, the messaging is subtle – that the MPC expects the economy to fare well on both counts this year. This comes at a time when the World Bank has just lowered its forecast of GDP for India. The RBI does believe that both the domestic and external sectors are doing well to warrant such optimism.”