As India's India's Monetary Policy Committee announced a surprise rate pause, economists do not expect further hikes. But they are divided on the possibility of a rate cut in fiscal 2023-24 even as consumer inflation remains above the tolerance band.
The MPC decided to keep the benchmark repo rate unchanged in a unanimous decision at 6.5% even as the committee will be ready to act should the situation warrant. That likely brought down the curtains on the steepest rate hike cycle in at least a decade.
Extended Pause
The forward guidance is unwaveringly hawkish, according to Indranil Pan, chief economist at Yes Bank. It considers inflation an ongoing risk and keeps the door open for further rate increases in the future by not changing its stance of "withdrawal of accommodation", he said.
"Effectively, I think that the RBI has now moved into an extended pause," Pan said. Given the large number of moving pieces, it would be difficult to predict immediately if the next change is a hike or a cut.
Impending Hit To Demand
The MPC surprised everyone by keeping policy rates unchanged while keeping options open for future rate actions and maintaining a "withdrawal of accommodation" stance, said Dharmakirti Joshi, chief economist at Crisil.
Amid volatile global developments and tight financial conditions, the RBI will remain data-dependent on setting rates, Joshi said. It will also now want to carefully evaluate the consequences of a cumulative 250-basis-point rate hike since May 2022, which has been the fastest pace of hikes in the past decade, he said.
The monetary policy typically impacts the real economy with a lag of three to four quarters, with the full impact expected to slow growth and moderate inflation in FY24, Joshi said. The RBI is likely to respond by cutting rates towards the end of fiscal 2024.
With the ongoing transmission of the RBI's rate hikes, Joshi said, nominal interest rates have moved well above pandemic levels across different market segments.
Another Hike UnlikelyĀ
Though the RBI has paused on the policy rate front, it has also strongly reiterated its commitment to bringing down inflation, according to Rajani Sinha, chief economist at CareEdge. Given the uncertain global environment and lingering risks to inflation, it is apt that the central bank keeps the window open for further monetary policy tightening in the future if required, she said.
However, with inflation likely to trend downward from the current level, it is unlikely that the RBI will have to hike rates further in 2023. "We expect a status quo in the policy rate in 2023," Sinha said.
The RBI is quite optimistic about India's GDP growth despite raising concerns about the risk posed by the uncertain global economic environment, Sinha said. The central bank's GDP growth projection of 6.5% is higher than CareEdge's outlook of 6.1% for fiscal 2024, she said.
Growth Projection Optimistic
The RBI, while delivering a hawkish pause, kept its stance unchanged at "withdrawal of accommodation", justifying it by still looming inflationary risks, according to Abheek Barua, chief economist at HDFC Bank. However, the growth projection was surprisingly revised upward to 6.5% for FY24, while the inflation forecast for Q4 FY24 was revised downāmost likely on account of base effects.
"We expect that growth could be lower at 6% this fiscal while there are upside risks to the RBI's inflation forecast, especially given the impending risks around oil prices and the performance of the monsoons," he said.
The RBI could go for "the higher for longer" narrative, staying on an extended pause in FY24 while tightening liquidity conditions, Barua said. Therefore, short-term rates could remain under pressure over the coming months, he said.
The 10-year bond yield could see some pressure return once the government's borrowing program kicks in, Barus said, who sees it trading in the 7.20ā7.30% range in the first quarter of fiscal 2024.
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