Why RBI’s status quo on key rates has not surprised some

For many, including several market experts, the recent unanimous decision of the Monetary Policy Committee (MPC), the rate setting panel of the Reserve Bank of India (RBI), to maintain status quo on key interest rates, has come as a big surprise. Many of them expected a 25 bps, or 0.25 per cent, hike in repo rate as India's inflation remained at elevated levels.

Belying the expectations, the central bank has kept the key repo rate unchanged at 6.5 per cent. For the uninitiated, repo rate is the key interest rate at which RBI lends funds to banks.

But RBI's latest move has not surprised us at all. Bizz Buzz reported on March 22 this year that experts close to the Modi government were arguing against any further interest rate hike by the apex bank. It was also mentioned in the report that the Akhil Bharatiya Pratinidhi Sabha (ABPS), which is the highest decision-making body of Rashtriya Swayamseva k Sangh (RSS), reportedly discussed this issue and expressed its concerns over increasing interest rates at its recent meeting in the Panipat district of Haryana.

Laghu Udyog Bharti, which espouses the cause of micro, small and medium enterprises (MSMEs) and SwadeshiJagranManch, which bats for a self-reliant India, also voiced concerns against the high interest rates prevalent in the country. Both are part of SanghParivar.

The Union Finance Ministry also sent out clear signals on the need to not goin for an interest rate hike at this juncture. This was endorsed by Bibek Debroy, the Chairperson of the Economic Advisory Council to the Prime Minister (EAC-PM). These signals from the ruling establishment and its support base might be one of the main reasons for RBI opting for a status quo. Furthermore, unlike in the past when it gave a split verdict, MPC made a unanimous decision this time around. Shaktikanta Das, who took over as the 25th RBI Governor in December 2018 after Urjit Patel resigned suddenly following alleged differences with the Modi government, played a constructive ally role when it came to dealing with the central government. There’s nothing wrong in that as long as the Indian economy is not adversely affected and common people are put to hardships.

Whatever the reasons for RBI’s latest move, it is a good decision not to go for a rate hike at this point in time. The apex bank has continuously been raising interest rates from last May. So far, it hiked repo interest rates by 250 basis points, or 2.5 per cent, to 6.5 per cent from four per cent.

Of course, the MPC, more or less, followed the US Federal Reserve while taking the rate hike decisions. However, it differed with its US counterpart in the latest round.

The US banking sector landed in a major crisis after the March 2023 collapse of the $209-billion Silicon Valley Bank (SVB), which largely provided funding to startups around the world. It was the second largest bank failure in US history after the closure of $308-billion Washington Mutual during the 2008 global financial crisis. Two days later, Signature Bank, another US bank worth $100 billion, met a similar fate. The spate of interest rate hikes by the US Fed was largely blamed for the banking crisis, which spread to Europe and took a heavy toll on Credit Suisse, a Zurich-based global investment bank. These developments might have come as a wake-up call for the Modi government, besides prompting RBI to divert itself from US Fed’s path and go for a pause, which obviously pleased all stakeholders, more so the real estate sector.

Real estate players feared that interest rates on home loans would go further up and cross the 10 per cent mark had RBI gone ahead with more hikes. That scenario will obviously act as a dampener and drive away new home buyers.

With that not being the case now, real estate companies are in a bit of an upbeat mode. India Inc also welcomed the RBI move as it could act as a sentiment booster for the country’s economic growth. RBI raised GDP forecast to 6.5 per cent for FY24, the new financial year that kicked off on April 1, with first quarter upswing pegged at 7.8 per cent. Given the crisis in the US banking sector and layoffs in the tech sector of the world’s largest economy, RBI’s projections are surely in an optimistic zone. The World Bank recently slashed India’s FY24 GDP forecast to 6.3 per cent from 6.6 per cent. The Asian Development Bank (ADB) cut its estimation to 6.4 per cent from its previous projection of 7.2 per cent GDP upswing for FY24. IMF also said India would grow at 6.1 per cent in the 2023 calendar year, down from 6.8 per cent in 2022. It is to be seen what RBI will do to push up the growth to its projected levels.

Though everyone, including those in the ruling dispensation, is happy with the RBI’s decision to hold interest rates, the move will push up inflationary pressures. Retail inflation slowed a bit to 6.44 per cent in February this year. But it’s still above the RBI’s tolerance limit of 2-6 per cent for the second straight month. The rate cut is the only major weapon the RBI has at its disposal to rein in inflation. Despite going for a rate cut pause, RBI projected a lower inflation target of 5.2 per cent for the current financial year. One wonders how the RBI will achieve this rather ambitious target.

Though the Modi government seems to be happy with the rate cut pause, it doesn’t obviously relish a higher inflation at a time when the country is getting closer to the 2024 General Elections in which BJP is eyeing a record third consecutive term at the Centre. On that count, RBI and its chief Das will be on a sticky wicket. It remains to be seen how he will handle the tricky situation. Will he go for interest rate hikes in the future? Time will tell.