RBI's MPC 'decisively' in a rate-pause mode as inflation cools down

• The RBI’s Monetary Policy Committee (MPC) left rates unchanged in a surprise move earlier this month.
• Cooler inflation has boosted expectations of a ‘decisive’ rate pause for a prolonged period.
• That said, economists have flagged El Niño and a resurgent crude as key risks that need to be monitored going forward.

The Reserve Bank of India’s Monetary Policy Committee (MPC) sprung a surprise by pausing rate hikes when it met earlier this month, noting that it will wait to gauge the effects of the hikes done so far since May last year. Now with inflation falling to a 15-month low in March, there is a growing consensus that we may have entered the prolonged rate-pause territory.

While making the rate-pause announcement, RBI governor Shaktikanta Das said the MPC expected softer inflation going forward thanks to lower commodity prices. He stressed that the battle against inflation was not over yet and the possibility of further rate hikes cannot be ruled out.

This was before the retail inflation numbers measured by the consumer price index (CPI) came in – at 5.66%. For March, it was below the RBI’s upper tolerance limit of 6%. The cooling inflation builds a strong case against future rate hikes, say economists.

“RBI may have just hit the pause button as inflation trajectory looks below 6% for the rest of FY24 while deftly managing liquidity in the system,” said economists at SBI Research.

RBI fine-tuned its inflation and growth projections for FY24 – while inflation expectation has been trimmed from 5.3% earlier to 5.2%, gross domestic product (GDP) expectations have been revised upwards from 6.4% to 6.5%, which suggests that the central bank is now on a surer footing about the Indian economy.

The International Monetary Fund has also highlighted that three out of four countries in the world will experience disinflation in 2023. As far as monetary policy is concerned, the SBI report adds that 90 out of 147 countries have kept their rates unchanged, while 48 countries cut rates in the current cycle. Only 9 countries hiked rates, it added, suggesting that the MPC did not actually break away from most of the world’s economies.

“We estimate the FY24E average CPI inflation at 5.4% and maintain our view of a prolonged pause by the MPC in FY24,” said a report by Goldman Sachs.

El Niño and boiling crude oil could spoil the party

The threat of El Niño, however, looms. El Niño is a weather phenomenon that occurs every few years and can lead to droughts or below-average rainfall in India. A weak monsoon could hurt growth across various sectors of the Indian economy and force the MPC’s hand if inflation spikes again.

If El Niño materialises, it could adversely impact farm output. Earlier, the Finance Ministry had also flagged its concerns amidst an Indian Meteorological Department (IMD) prediction of above-normal temperatures in India this year.

“An El Niño this year will negatively impact kharif sowing and next year’s rabi sowing due to lower availability of water,” said JM Financial. If farm output is affected, it could lead to higher prices and push inflation back up. For instance, unseasonal rains have already led to tight supply conditions, leading to a 22% increase in the prices of pigeon peas in Q4.

However, earlier this week, the IMD projected a ‘normal’ monsoon with rainfall at 96% of the long-period average.

A resurgent crude oil is another risk factor – in the last one month, Brent crude oil prices have risen by over 10% amid cooling inflation in the US. If the crude prices ride higher, it could keep prices elevated in India, forcing the MPC to rethink its rate-pause strategy.

SEE ALSO:

What can ₹1 get you? 30 minutes of trailers at PVR Inox

Client meetings 'start and stop with ChatGPT' says India's largest IT company

Infosys sees 4-7% revenue growth in FY24 after it misses its FY23 guidance