It’s a pause, not a pivot: RBI Governor on decision to hold interest rate

Governor Shaktikanta Das on Thursday said "it's a pause and not a pivot" about the Reserve Bank's surprise decision to hold the key policy rate

Mumbai: Governor Shaktikanta Das on Thursday said “it’s a pause and not a pivot” about the Reserve Bank’s surprise decision to hold the key policy rate at 6.50 per cent after hiking the rate six times since May last year.

Cumulatively since last May, Reserve Bank of India (RBI) has increased the interest rate by 250 basis points to tackle inflation and the Monetary Policy Committee’s decision on Thursday to leave the repo rate unchanged came as a surprise.

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RBI Deputy Governor Michael Patra, who heads the monetary policy department at the central bank, said, “this pause is valid till 10 am on June 8, 2023 when the Governor will announce the next policy review”.

While leaving the key rate unchanged, MPC members were unanimous in their view that it is time they reviewed the outcome of the past six consecutive rate hikes since May last year.

“If I have to characterise today’s monetary policy in just one line, it would be it’s a pause and not a pivot,” Das told reporters at the customary post-policy presser.

The surprise move also comes against the backdrop of inflation still remaining high amid rising external risks, including concerns over the health of the global financial system.

“We’ve said that MPC stands ready to act should the situation so warrant in the future meetings. So, I think banks and anybody else can draw their own inferences but I think, it will be desirable that they sort of take our word seriously. And I think they do take our words seriously and act accordingly in pricing their future actions,” Das said.

According to him, there has been an effective rate increase of 290 basis points since May last, including the 40 bps increase in the SDF (Standing Deposit Facility).

He said these hikes have translated to a monetary policy transmission by way of the increase in the overnight call rates, which have soared by 320 bps between March 2022 and March 2023.

“(This) means that the daily average call money rate has gone up from 3.32 per cent in March 2022 to 6.52 per cent in March 2023. Therefore, the effective increase in the policy rate has been in the order of
320 bps.

“Given this, MPC felt it necessary to assess the cumulative impact of our actions taken so far. My third point is that we’ll not hesitate to take further action in future as may be necessary. So, the job is not yet finished. Finally, given the overall macroeconomic and financial stability, our priority continues to be price stability,” Das said.

Further, Das said MPC stands ready to act should the situation so warrant in the future meetings.
To a question on how long this pause will remain, Das cited cricket and said, “it depends on how each ball is played… we’re watchful of how it is playing out since the monetary policy is always forward looking”.

“We are watchful of the impact of the action taken so far as so many external developments taking place both with regard to inflation and with regard to growth and so many other things. So, we’ll be watchful of the overall situation and the monetary policy being forward looking, we’ll take further action whenever we think appropriate,” he noted.

Patra said that in the fight against inflation, interest rates alone have not been used. “They’ve been used in conjunction with supply-side measures because alongside demand pressures, there have been multiple shocks, overlapping shocks on the supply-side”.

“And as in a game of chess, we keep on thinking about our forward moves and we will act when the time arises,” Patra said.

To a query on whether the surprise pause in policy action reflects the decoupling of the monetary policy from that of the US Fed, Das said, “with regard to coupling with the US Fed, you know, it has never been so. Though for some reason, a section of the market has been seeing it that way.

“Repeatedly, I have been stressing that our monetary policy is determined primarily by domestic factors. So, therefore, we were never really coupled with the US Fed action”.

On the reason for marginally increasing the growth forecast to 6.5 per cent for FY24, Patra said the marginal increase from the past policy review is primarily due to a likely fall in crude prices, “which we assume to trade in the range of USD 85 a barrel, down from over USD 90 average last fiscal”.

Effectively, the forecast is 50 bps lower than the FY23 growth rate. In the February monetary policy, the growth forecast was lowered to 6.4 per cent.

“Relative to the last meeting, we are much better off today. If you recall, at that time, we were 0.9 percentage points above the four quarters rate. Today, we are 1.3 percentage points. So, if you are a disinflationary central bank, you should react more than proportionately to the change in inflation. And we have achieved that in this meeting.

“But let me tell you this, pause is valid till 10 am on June 8, 2023, when the Governor will address you again after the MPC meeting,” Patra quipped.

MPC sees GDP growth at 7.8 per cent in Q1, 6.2 per cent in Q2, 6.1 per cent in Q3 and 5.9 per cent in Q4, averaging at 6.5 per cent for 2023-24.

Inflation is projected to average at 5.2 per cent in the current fiscal and meeting the 4 per cent target rate in FY25.

According to MPC, retail inflation in Q1 is expected to be 5.1 per cent, 5.4 per cent in Q2 and Q3 and at 5.2 per cent in the final quarter of the current fiscal.