What could be the reason for RBI’s early pause in repo rate when inflation is still high? Posted on April 6, 2023 by admin [ad_1] In a surprise move, RBI kept the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 6.50%. Subsequently, it also kept the standing deposit facility (SDF) rate unchanged at 6.25%, while the marginal standing facility (MSF) rate and the Bank Rate were also unchanged at 6.75%. Nilesh Shah, MD, Kotak Mahindra Asset Management Company said, “The RBI’s pause is like Sachin stroke on a tricky pitch but with eyes set in and having the luxury of hitting the ball where ever he wanted. The RBI had the option of a rate hike or a pause. The pause was not entirely unexpected.” But RBI did not make any changes in its policy stance. The six-member MPC decided to remain focused on the withdrawal of accommodation to ensure that inflation progressively aligns with the target while supporting growth. This is an indication, that the “rate hike” scenario in the near term cannot be ruled out as well. The central bank’s policy decisions are in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4% within a band of +/- 2%, while supporting growth. That means the upper tolerance limit is 6%. Inflation still stays above RBI’s upper tolerance limit of 6%. In February 2023, the latest reading of CPI is at 6.44%. RBI has factored inflation downward at 5.2% for the fiscal year FY24, while GDP growth is projected at 6.5%. So why did RBI choose to pause the repo rate when inflation is still high? Dhiraj Relli, MD & CEO, of HDFC Securities said, the pause may reflect MPC members’ intention of not upsetting the growth momentum despite persistently high inflation. Inflation is still a cause of worry for RBI, however, the central bank is playing safe amidst the OPEC+ production cut for 2023 and banks’ liquidity crisis in the Western economies such as the US and Europe. But the pause is also seen as a temporary action, and rate hikes are still very much on the cards for various factors including high inflation. According to Anitha Rangan Economist, Equirus, “while there may be many reasons to pause, the fact that RBI has noted their “readiness to act should the situation warrant” and “job is not yet finished” suggests that the pause in all likelihood is temporary. If Fed hikes RBI will be bound to hike once more. The recent oil supply action from OPEC is a reminder of global uncertainty. There may be room to pause but not led the guard down!” Equirus economists can currently think of four reasons for the pause — 1) the government borrowing program which has just begun needs support; 2) Currency led by global factors is giving some elbow room to pause; 3) Watch the Fed policy in May; 4) allow some time for genuine transmission of policy hikes done so far. Further, Rahul Shresth – Vice President at Avener Capital said, by lowering inflation projections to 5.2% and increasing the GDP forecast to 6.5% RBI has highlighted its commitment to maintaining growth while keeping the prices in check. With an emphasis on the inflation target of 4% and withdrawal of accommodation, RBI has kept a non-committal stance on such pauses in the forthcoming meeting. Similarly, Indranil Pan – Chief Economist, YES BANK said, by pausing its rate hiking cycle, the RBI clearly takes into consideration a likely moderation in inflation going forward. The Governor mentions recent surveys that indicate a reduction in cost concerns and a drop in household inflation expectations. Oil price projections have been lowered and a good rabi harvest factored in the build-out of the future inflation trajectory. Keeping an eye on the evolving global financial stability concerns, the RBI preferred to pause to take stock of the impact of the 250 bps rate hikes that it has already done over the past 11 months. On the other hand, Yes Bank’s economist added, “the Governor indicated that “the war against inflation has to continue” and that the RBI is keenly intent in seeing the inflation within the target band. Any inflation shocks in the future thus remains on a close watch. Consequently, the forward guidance is unwaveringly hawkish. It considers inflation being an ongoing risk and keeps the door open for further rate increases in the future by not changing its stance of “withdrawal of accommodation”. Effectively, I think that the RBI has now moved into an extended pause. Given the large number of moving pieces, it would however be difficult immediately to predict if the next change is a hike or a cut.” Also, Rohit Arora, Co-Founder & CEO, Biz2Credit said, “Since the economic uncertainty has increased as well as the chance of US recession after the crisis in mid-size banks in US, RBI is playing safe by not increasing the repo rate which would have increased the cost of money as well as lowered the GDP growth rate. Since OPEC has reduced the oil production leading to oil prices spiking from $70 to $84 it can lead to higher inflation necessitating further rate hikes by fed and RBI. RBI is walking a tightrope as of now as it needs to balance GDP growth against the inflationary pressures which r pretty evident in the economy as of now. In case the oil prices remained hiked and inflation does not come down , RBI has still kept the option open for mid cycle rate hike. The impeding US recession and a looser US labour market should help RBI to buffer against increase repo rates and that’s the bet it seems to be taking as now. RBI does not want to do rate hikes in view of slowing global economy and heightened geo political tensions.” But will Fed choose to pause in its key rates ahead? Ranen Banerjee, Partner, Economic Advisory Services, PwC India said, “The US Fed is also likely to go on a pause given the emerging payroll data weakness and the risks on the banking system. The 10 year yield differential between US and India has expanded to around 4% and thus this would also have alleviated concerns related to fund outflows by hitting the pause button. The inflation is likely to soften owing to base effect kicking in and further moderation in commodity prices following weak economic data from US. We should expect a long pause on the repo rates going forward for at least three to four quarters and RBI will utilise other monetary policy tools in its arsenal towards managing any short term challenges.“ Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates. More Less [ad_2] Source link Post navigation Goldman Sachs’ education programme helped 2,400 Indian women entrepreneurs generate 28,000 cr revenueAnil Antony, son of veteran Congress leader AK Antony, joins BJP Leave a Reply Cancel replyYour email address will not be published. Required fields are marked *Comment * Name * Email * Website Save my name, email, and website in this browser for the next time I comment.