Monetary Policy Committee likely to ‘pause’ interest rates

The Reserve Bank of India's (RBI) Monetary Policy Committee (MPC) may not change the interest rates and continue with the 'pause' mode at their upcoming meeting, opined many experts.

The MPC met on April 3, 5 and 6 and decided to pause on the repo rate at 6.50 per cent after continuous hiking earlier as an inflation control measure.

"The upcoming MPC meeting early this month is expected to focus on two important aspects that have emerged in the last few weeks -- a sustained moderation of the headline retail inflation and a better than expected GDP growth print in Q4FY23," Suman Chowdhury, chief economist and head (Research) Acuite Ratings and Research said.

According to Chowdhury, the consumer price index (CPI) inflation moderated in April-2023 to 4.70 per cent year-on-year (YoY), an 18-month low and remained within the RBI's target range (2-6 per cent) for the second consecutive month.

"The wholesale price index (WPI) inflation moderated to a 34-month low of minus/(-)0.92 per cent YoY in Apr-23, retreating to negative territory after a gap of 33-months," Chowdhury added.

Core retail and wholesale inflation also moderated to an 11-month low of 5.48 per cent YoY and 41-month low of minus/(-)1.77 per cent YoY in Apr-23, respectively.

According to him, benign trajectory for both WPI and CPI can be attributed to easing food inflation, lower commodity costs, favourable statistical base effects and lagged impact of past monetary tightening measures.

"Potential risks such as the El Nino notwithstanding, we expect a continuing moderation in headline CPI inflation in FY24 although core inflation can prove somewhat sticky amidst the strong growth momentum in services, especially contact intensive ones. We maintain our FY24 CPI inflation projection at 5.3 per cent as compared to 6.6 per cent in the previous year," Chowdhury said.

As regards the GDP numbers, he said that the provisional estimates for GDP in Q4FY23 and FY23 as a whole, has surpassed the consensus figures in the market.

"As against our estimate of Q4GDP of five per cent, the actual print has come at 6.1 per cent YoY and significantly higher than the 4.4 per cent YoY in Q3FY23. Overall, the GDP growth for FY23 stands at 7.2 per cent as compared to the seven per cent reported in the advance estimates earlier," he said. However, the concern remains on the demand side as private consumption has grown by 2.8 per cent YoY only in the fourth quarter, Chowdhury remarked.

For the current year, Acuite Ratings continue to forecast a growth of six per cent given the expected impact of the global uncertainties and the lagged impact of the interest rate hikes in the domestic economy although RBI has pegged it at a more optimistic 6.5 per cent, he said.

"Given such a scenario on the growth-inflation dynamics, we believe RBI MPC will prefer to adopt a "wait and watch" mode before taking any confident action on any rate changes. The ‘pause’ mode is hence likely to continue for another two quarters," felt Chowdhury.

On his part, Churchil Bhatt, Executive vice-president & Debt Fund Manager, Kotak Mahindra Life Insurance Company Limited, said the market is not anticipating an immediate rate cut.

"The best case for the June policy would be a softer 'stance' by the MPC. The current policy stance of 'withdrawal of accommodation' has already run its course, with pandemic-era policy accommodation behind us. It's only a matter of time before the MPC moves to a 'neutral' stance," Bhatt said, adding that MPC is likely to maintain a status quo on rates.

At the April meeting, the MPC also decided to remain focused on withdrawal of accommodation to ensure that inflation progressively aligns with the target, while supporting growth.

Arguing for a pause Ashima Goyal, Emeritus Professor, Indira Gandhi Institute of Development Research, Mumbai, said as the inflation forecast for FY24 is 5.2 per cent with Q4 at 5.2 per cent, a repo rate at 6.5 per cent implies the real policy rate is greater than one.

"It has already tightened enough to progressively bring inflation towards the target of four per cent, with other complementary policies and barring major new shocks. A further rise in real interest rates is best avoided at present since high real rates can trigger a non-linear switch to a low growth path," Goyal said.

He and Prof. Jayanth R. Varma, Professor, IIM, Ahmedabad were against hiking repo rate at the recent MPC meetings.

Varma said he does not understand the meaning of the term 'stance' - withdrawal of accommodation.

"Turning to the stance, I must confess that I fail to comprehend its meaning. My colleagues in the MPC assure me that the language is crystal clear to market participants and others. It may well be that I am the only person who finds it hard to understand," Varma said.

"But I am unable to reconcile the language of the stance with the simple fact that no further 'withdrawal of accommodation' remains to be done since the repo rate has already been raised to the 6.50 per cent level prevailing at the beginning of the previous easing cycle in February 2019. It is, of course, possible to undertake further tightening, but that would not constitute a 'withdrawal of accommodation' by any stretch of the imagination," Varma added.