Will RBI go for prolonged pause on rate cuts in FY23?

Addressing media immediately on conclusion of three-day marathon meeting of Monetary Policy Committee (MPC) earlier this month, RBI Governor D Shaktikanta Das had said that it is a tactical pause, not a pivot.

Hence, the key issue now is if RBI will continue to press the pause button while reviewing its annual monetary policy from now on.

The minutes of the April MPC meeting highlights members’ increased concerns on the inflation outlook. On growth, members were optimistic while noting risks of overtightening. Kotak maintains its view of a prolonged pause by the MPC in FY24.

Most MPC members highlighted that the decision to pause did not signal the end of the rate hike cycle. While, broadly, members were optimistic on the future trajectory of inflation, they remained wary of unfavourable conditions materializing. Governor Das also stated that a ‘focus on bringing about a durable moderation in inflation’ has to remain while evaluating the impact of past actions, calling the current decision as a tactical pause and not a pivot.

Besides, MPC members remained satisfied with the growth trajectory, stemming mainly from the central government’s focus on capital expenditure.

While the increasing upside risks to inflation have led to members keeping room open for further tightening, analysts feel that there will be a prolonged pause by the MPC in the current fiscal given that inflation is likely to moderate but remain above 5 per cent.

The April MPC meeting minutes have some hawkish traces, which seem somewhat disconnected from the dramatic 6-0 vote shift to a pause. The members were unanimous on assessing the lagged impact of past rate hikes. But there was not enough reckoning of global uncertainties led by banking risk events and sharp policy repricing in the West that possibly influenced this emphatic vote swing.

The extent of inflation concerns seemed to be varying among MPC members. A section of the six-member monetary policy committee argued the MPC should stay vigilant and ready to act pre-emptively, to fight inflation. No clear reasoning was given on why did it opt for a pause.

Even as the hawkish traces in the minutes seem disconnected from the dramatic 6-0 vote shift, they have placed greater focus on domestic and global uncertainties as inflation slows. Analysts believe that MPC has seen a shift in weightage of the policy reaction function in favour of the external world policy dynamics, insistence on keeping an open-ended policy with no change in stance, reinforcing the inflation-fighting credibility but acknowledging its moderation ahead.

The pause, an Emkay study reveals, appears to be for good, especially with ex-ante real rates at 1.4 per cent – keeping its one-year forward inflation forecast as the anchor, giving comfort and flexibility on their supposed stance and actions ahead.

Let us hope to see ‘pause’ button remains pressed by the MPC on the rate hike for now or at least for the current fiscal.