RBI monetary policy: MPC likely to keep the pause-button pressed

• The Reserve Bank of India’s Monetary Policy Committee (MPC) is likely to pause rate hikes when it meets later this week, as per economists.
  
• The broad consensus is that a prolonged pause on rates may be seen till the end of 2023.
  
• Economists say that India is in a ‘goldilocks’ situation thanks to strong macroeconomic data and cooler inflation.
  

The Reserve Bank of India’s Monetary Policy Committee (MPC) could/should decide to pause interest rate hikes when it meets later this week, as per eminent economists. The consensus on the street is that the RBI Governor Shaktikanta Das-led panel will keep the repo rate unchanged at 6.5% thanks to cooler inflation.

The primary reason for this belief is that the retail inflation (based on consumer price index, or CPI), came in significantly lower at 4.7% in April this year, down from 5.66% in March. This is comfortably below the central bank’s upper tolerance limit of 6%.

In addition to cooler inflation, uncertainty around the trends in global commodity prices and growth could push the MPC to maintain its ‘wait and watch’ approach for the time being.

The crucial monsoon season beginning this month and the impact of a potential El Niño will also figure in the MPC’s decision-making process.

“We expect the stance to be maintained this month as the MPC will prefer to stay on wait-and-watch mode to gauge the fallout of weather conditions on the price trend before considering a pivot to easing. Supportive recovery prospects also lower the urgency for a quick turn in the policy direction,” said Radhika Rao, executive director and senior economist, DBS Group.

The sticky core inflation finally fell below the 6% mark for the first time in 19 months in April to 5.2%. RBI governor Shaktikanta Das has underlined his concerns about sticky core inflation for a long time now, so this fall is much needed.

Prolonged pause

The broad consensus amongst economists is that the MPC will maintain its rate pause stance for the second consecutive time, after breaking away with the US Fed’s FOMC and keeping the rates unchanged in its April meeting.

“Considering the prevailing ambiguity surrounding the future path of the Federal Reserve's rates in the coming months, our perspective leads us to anticipate a dovish message from the MPC,” said Deepak Agrawal, chief investment officer, debt, Kotak Mahindra AMC.

Agrawal added that the focus is now on whether the MPC will signal a pivot in its monetary policy or continue with its current stance of withdrawal of accommodation.

The long-pause

With that said, there is a consensus amongst economists that we could be in for a prolonged pause, likely extending to the end of 2023.

“We maintain our baseline view that the RBI will likely keep the policy repo rate unchanged at 6.50% in the June 8 policy meeting. We expect the RBI to remain on hold till the end of the year,” said the analysts at Goldman Sachs.

Stronger growth, cooler inflation

India’s GDP growth sprung a ‘pleasant surprise’ in Q4, coming in at 6.1% while analysts had forecast a growth of just 5%. In FY23, too, the GDP numbers at 7.2% were ahead of even the government’s estimates of 7%.

Goldman Sachs analysts say that the inflation print in Q1 could be around 4.6%, as against RBI’s estimates of 5.1%. With April print coming in at 4.7%, there is further room for decline in May and June prints.

Apart from this, most economic indicators across agriculture, manufacturing and services sectors are holding up, according to economists.

According to the economists at SBI Research, we could see an upward revision in GDP growth forecasts while inflation estimates are expected to be downgraded in the June MPC meeting.

“Frontloaded rate action by RBI has resulted in frontloading inflation trajectory. Inflation data till October would be decisively below 5%,” SBI Research said.

Economists say that India is in a ‘goldilocks’ situation thanks to robust macroeconomic activity and cooling inflation. While a rate pause is highly certain, any hints of a pivot in monetary policy will be closely watched.

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