A timely pause

The Reserve Bank of India’s (RBI’s) move to pause the hike in policy repo rate, despite inflation remaining well above the upper tolerance band of 6 per cent and the US Fed along with other major central banks still going for policy rate hikes, is a bold but calculated move. The confidence of the move is reflected in the fact that after a considerable time, the Monetary Policy Committee (MPC) voted unanimously. For the last couple of quarters, there were dissenting voices at the panel, expressing their concerns around a potential slump in growth due to perpetual rate hikes. Since May last year, the RBI has raised the policy repo rate by 250 basis points on a continuous basis, with effective interest rates touching still higher. The cycle of rate hikes was completely justified as the retail inflation in April 2022 stood at a staggering 7.8 per cent and the US Fed went for rampant rate hikes. Data released by the Ministry of Statistics and Programme Implementation last month showed that retail inflation declined marginally to 6.44 per cent on a year-on-year basis in February as against 6.52 per cent in January. Now, the RBI’s projections show that inflation could come down to 5.2 per cent by the end of March 2024. The fact is that India’s central bank has substantially brought the inflation down, though it may still be a cause of concern. Also, the full impact of the previous rate hikes is yet to materialise on the ground. At this juncture, the central bank’s decision to temporarily halt the rate hike and observe the direction in which inflation is headed is a wise move. The clear caveat put forth by the RBI that “this is a pause and not a pivot” means that the regulator would be ready to act if things somehow go awry on the inflation front. Given that the country’s economy is one of the most well-placed economies in the world in terms of growth, it certainly can afford the privilege of taking a pause and making a sensible decision. However, there are certain risks as well that dot the grey area. One major concern is the uncertainty around the threshold that is supposed to nudge the central bank to act further towards containing inflation. If the RBI prolongs the pause at the current, or even slightly lower inflation print, then it would mean a perpetuation of moderate inflation that could torment the poor and lower-income sections of population. There are ample chances that in the medium term, the RBI’s decision may translate into normalisation of a more-than-average inflation. However, given that the RBI makes regular assessments, one can certainly rest their hopes on the wisdom of the central bank! Furthermore, the US Fed’s adamance towards increasing policy rates, followed by similar actions from other central banks, may affect the investment scenario in India. The banking regulator and the government need to be vigilant on this front, particularly as the overall global investment scenario is in a defining phase after the disruptions caused by the Russia-Ukraine war. These concerns notwithstanding, there is, of course, the classic question of growth versus inflation balancing. Though India is a bright spot, globally, in terms of economic growth, that leverage might be losing its sheen. While the Reserve Bank’s projection for growth has improved marginally from 6.4 per cent to 6.5 per cent, other prominent forecasts don’t necessarily align with this narrative. The World Bank and some of the prominent rating agencies have pegged India’s growth rate lower than the RBI projections. Thus, it might not be wrong to say that the pause in the rate hike was important to stave off the potential slippage on the growth front. In sum total, RBI’s decision to halt the policy rate hikes temporarily is a smart, timely and balanced move. There is a greater likelihood that the impact of previous rate hikes will materialise in the coming months, leading to greater financial stability. However, if things unfold contrarily, the central bank has left the scope open for itself to further increase the rates.