The Reserve Bank of India's Monetary Policy Committee may have stunned market participants with a surprise status quo on the repo rate, but in the communication that followed in the press meet, RBI Governor Shaktikanta Das was forced to underline that this was a pause and not a pivot.
The important thing to note is that the "not a pivot" comment is not in the original statement he read out today or in the press release on the Monetary Policy Committee's decision to maintain a pause.
Das' statement used the term ‘pause' after mentioning the status quo on rates, but clarified that this pause was intended for just this meeting. Later in the same statement, he said, "The MPC will not hesitate to take further action as may be required in its future meetings."
The statement on the MPC resolution never mentions the word "pause." It only states that the repo rate has been left unchanged and echoes the clarification from Das that they will not hesitate to take further action at future meetings.
The MPC statement, which is the actual record of the decisions and text agreed upon at the meeting, not mentioning the words ‘pause' or pivot is a crucial point that central bank watchers will note. Even if the word ‘pause' is largely in sync with the decision to maintain the status quo on the repo rate and can be explained away.
What happened between the governor's press statement at 10 a.m. and the press conference at 12 p.m. for Das to slip in the clarification that this was ‘not a pivot?'
The answer may lie in the knee-jerk market reaction in the benchmark 10-year 7.26%, 2032 bond yield. Reacting to Das announcement of the status quo on the repo rate followed by the use of the word ‘pause, the 10-year bond yield fell to 7.15%, down almost 14 bps from 7.29% before the policy.' The 10-year bond eventually closed at 7.21%.
The bond yield movement indicated that, despite the caveat that this status quo is specific to this meeting, as stated by both Das in his original statement and the MPC resolution, the markets saw this as a declaration that the rate hike cycle has ended.
After all, the MPC had already raised the repo rate by 250 basis points, with RBI's Standing Deposit Facility introduction contribution adding an additional 40 bps to policy tightening. Two external members, Jayanth Varma and Ashima Goyal, had voted against the 25 bps repo rate hike in the February meeting.
Importantly, Varma had in one of his minutes indirectly signalled 6.50% as an upper level for the repo rate.
And even as the markets were bracing for another 25 basis point repo rate increase today, with a possible shift in policy stance to ‘neutral' from ‘withdrawal of accommodation,' the MPC stayed put on rates and stance.
No matter what Das and the MPC were saying in their statements, the markets were reading it as an end to the rate hike cycle, and that is what was reflected in the 10-year bond yields.
In the gap between Das' televised statement and the press meet, many of the economists and market participants started changing their view not just on 10-year bond yields but also on when the MPC is expected to start slashing rates. Some banks have already issued notes talking about monetary policy easing with possible rate cuts starting as early as the October policy meeting.
This meant that Das and the RBI top brass felt the need to use the press meet as an avenue to underline that the MPC was not indicating a prolonged pause on the repo rate and that this pause was meant to let past rate hikes play out through the system.
This is why Das began his address to the press with: "This is a pause, not a pivot." He repeated a few times that this pause was meant to be only for this meeting and must not be interpreted as a signal for future meetings.
Additionally, the RBI Deputy Governor Michael D. Patra went a step further to point out that the status quo on rates was applicable only up to the next MPC meeting on June 6–8, 2023, at which point there would be a fresh view taken.
There are no accidents when central banks communicate. The phrase ‘not a pivot' to explain today's rate decision is no accident.
Central bankers are always aware that every word they say and every word they don't say will be parsed, dissected, and analysed ad nauseum.
The RBI felt the need today to go beyond the statement and explain what the status quo decision from MPC meant. Das first indicated that the pause must be seen purely from the perspective of how things stand when the MPC meets from April 6–8 and should not reflect on what the future rate trajectory could be since inflation remained elevated.
But, once the markets through bond yield movements began indicating their view that the RBI and MPC had turned ‘dovish', Das felt it was necessary to come out and say that not only is this pause meant only for now, it must not be misinterpreted as an indication that the central bank was set to pivot on rates.
A pause indicates status quo in central bank parlance. However, a pivot would have meant a change in direction, and today's pause can be seen as an indicator that the RBI and MPC are looking to ease the stance soon or even consider policy rate cuts in the not too distant future.
Curiously, it would be interesting to see if the MPC members echo or even agree with the choice of terms such as ‘pause' and ‘not a pivot' to explain today's policy decision. The minutes of this MPC meeting, which will be released on April 20, will make for interesting reading, even if the actual policy rate decision was unanimous.
It remains to be seen whether the markets and banks have heard the multi-layered messaging from the RBI today or whether they continue to expect the MPC to now begin easing monetary policy in the upcoming meetings.
T. Bijoy Idicheriah is a senior financial journalist who has been writing on the world of banking and central banking for 17 years.
The views expressed here are those of the author, and do not necessarily represent the views of BQ Prime or its editorial team.
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