RBI's silence on maintaining status quo on policy rates speak volumes

Silence is the best medium of communication, they say. Addressing on conclusion of three-day monetary policy committee (MPC) meeting, the RBI governor, Shaktikanta Das said: "It was unanimously voted by the MPC members to vote in favour of maintaining accommodative stance on key policy rates."

What was missing in his speech is the rhetoric which was being used by him in a number of such addresses in the past that 'keep accommodative stance as long as possible.' Thus, RBI has joined the chorus of Fed, which has hinted a series of rate hikes later during the year.

In fact, RBI continued to keep the repo rate unchanged for the 11th time in a row, at 4 per cent, keeping an 'accommodative' stance during its first monetary policy meeting of the current fiscal.

Yes, he did revise the inflation outlook upwards.

Retail inflation has remained above the central bank's 6 per cent upper tolerance band for the last two months. "Sharp pump prices may push inflation; edible oil prices to remain at an elevated level in the near future," Das said.

Moreover, the central bank moved the SDF and MSF corridor to 3.75 per cent and 4.25 per cent respectively. In effect, the overnight rate will move to 3.75 per cent. With VRRR and VRR being the key liquidity management tools – fixed rate repo as a benchmark has lost its relevance. In essence, overnight rates have been hiked to 3.75 per cent.

While the RBI has further extended liquidity support, it may be time to rethink its accommodative stance in the coming bimonthly policy reviews. Putting it differently, the RBI has finally crawled toward a change in policy stance by being 'less accommodative while focusing on the withdrawal of accommodation' even as it kept the policy repo rate unchanged unanimously. The move toward the stance adjustment is not a big surprise as the RBI had sent a clear message in the last policy that any stance change will be pre-telegraphed.

However, the RBI has also maintained that it will continue to adopt a nuanced and nimble approach to liquidity management even as it moves toward normalization going ahead in a multi-year cycle.

The change in stance could formally materialize in the next policy, even as the RBI crawls toward liquidity normalization. This also raises the probability of the rate hike cycle commencing in August, analysts say, while not fully precluding the case for a June hike, along with a stance change, if inflation realities worsen.

FY23 could thus see rates going up by 75-100bps, and the terminal rate may be a tad higher than 5 per cent with the RBI now showing an intent to keep real rates neutral. In a nutshell, even as the RBI has maintained status quo on key policy rates this time, it has paved the way for possibility of future hikes in key policy rates.