Silence speaks louder, exemplifies the RBI rate hike pause

Even as the RBI might have preferred to press the ‘pause’ button on rate hike and keeping the repo rate unchanged at 6.5 per cent, it has created more buzz than it could have by falling in line with the Fed by hiking the Repo rate by 25 basis points this time too. All the six members of MPC were unanimous that the repo rate should remain untouched as against the decision to hike with a 4:2 voting in the previous meeting. Interestingly, the RBI is not the only one to do so. The pause stance was first adopted by Reserve Bank of Australia in its bid to balance inflation objectives with financial stability. With cut in oil output by major oil producing countries, the cost push pressure will make any relaxation in policy tightening difficult. Thus, the Federal Reserve may continue with a token 25 bps rate hike for once. The pause adopted by RBA and RBI appears to be a wait and watch strategy to read the Federal Reserve’s mind in next cycle.

Ecowrap expects that the RBI may have just hit the pause button as inflation trajectory looks below 6 per cent for rest of FY24. In fact, the RBI has made a clear distinction between policy strategy and policy stance once again by asserting that they can coexist. While it has kept the stance same as ‘withdrawal of accommodation’ to calibrate liquidity and ensure that government borrowings face no disruption, its strategy has been changed by hitting the pause button on rate hike. The policy strategy may still indicate rate adjustment to quell inflation expectations, should inflation surprise on the upside beyond tolerance. An interesting pointer is the switch to unyielding core inflation from the sticky one. The MPC maintained its ‘withdrawal of accommodation’ stance and referred to monetary policy as accommodative. RBI governor Dr Shaktikanta Das, who also happens to chair the rate deciding authority what MPC is, hinted quite clearly that they could always go in for a hike later, if needed, as inflation is still higher than the target. However, the MPC revised lower its FY24 CPI inflation forecast to 5.2 per cent (crude oil assumption revised lower to $85/bbl from $95/bbl previously) from 5.3 per cent. This is despite an upward revision to its FY24 growth forecast to 6.5 per cent from 6.4 per cent.

The marginal downward revision to MPC's FY24 inflation projection is therefore, in Standard Chartered Bank’s view, likely driven by a more benign view of global growth and thus global commodity prices. Analysts believe that the MPC is unlikely to see the need to hike further, unless inflation once again moves above or closer to the upper threshold of the mandated band of 2-6 per cent. If such a scenario arises, the monetary policy hiking cycle may resume, beyond just one hike of 25 bps.