RBI continues to ‘watch inflation’ closely even as industry hopes for a pause

• A combination of repo rate hikes and a cool down in inflation has helped turn real interest rates positive, which remained negative for ten consecutive months in 2022.
  
• Industry and experts have called on the RBI to pause rate hikes to promote ‘sustainable growth’.
  
• RBI governor Shaktikanta Das’ commentary suggests that the central bank’s battle against inflation is not over yet.
  
• A pause might be on the cards as Das waits for the impact of rate hikes to flow through the system.
  

The Reserve Bank of India delivered its sixth rate hike since May 2022 on Wednesday, raising the repo rate to 6.5%, marking a 250 basis points increase as it continues to keep ‘Arjuna’s eye’ on inflation.

Despite real interest rates having turned positive after several months, RBI’s battle against ‘sticky’ inflation does not seem to be over yet.

In a press conference announcing the rate hike decision, RBI governor Shaktikanta Das made an observation that the central bank will continue to withdraw accommodation and bring inflation to its acceptable levels.

“The stickiness of core or underlying inflation is a matter of concern. We need to see a decisive moderation in inflation. We have to remain unwavering in our commitment to bring down inflation,” Das said, underlining that the bank’s primary focus is taming inflation.

Positive real interest rates mean your money is finally not losing value after ten consecutive months in 2022

Economists and experts believe that Das’ current priority is price stability over economic growth, despite real interest rates turning positive.

“Although real rates have turned positive and inflation has moderated, RBI is symbolically choosing price stability over growth,” said Amar Ambani, group president & head – institutional equities, Yes Securities.

Interest rates are considered to be positive when the benchmark interest rates are higher than the inflation. A positive interest rate means that your money is appreciating in value when you deposit it in a bank.

In 2022, until November, interest rates were negative, meaning your money lost its value if kept as a deposit in a bank. However, that has changed now, and the real interest rates are closer to 1%, which analysts believe is good for growth.

RBI has projected a 1-year ahead inflation rate of 5.6% (Q4 FY24), and compared to the current repo rate of 6.5%, the real interest rate stands at 0.9%.

Industry, experts ‘hopeful’ this is the last rate hike

Despite Das reiterating that the central bank’s priority is to tame inflation further, especially the ‘sticky’ core inflation, industry and experts are hoping that Wednesday’s rate hike is RBI’s last, in this cycle.

“In line with the other broad objective of sustainable growth, we want to believe this is the last rate hike by the RBI,” said Assocham secretary general Deepak Sood.

However, Das’ stance was hawkish, suggesting that he’s done yet with rate hikes, even though there could be a pause as the central bank waits to see the impact of rate hikes percolate through the economy.

Despite a cool down in inflation, Das said that it still remains above the RBI’s 4% target. He also underlined that an uncertain geopolitical environment means that the central bank will continue to keep a close eye on inflation and accordingly calibrate its rate hike action.

“The outlook is clouded by uncertainties from geopolitical tensions, global financial market volatility, rise in non-commodity prices and volatile crude oil prices,” Das said.

Das may not be done yet, but he may pause for a while

While his commentary was hawkish, Das noted that the rate hikes since May 2022 are still “working their way through the system”.

“The Monetary Policy Committee (MPC) was of the view that further calibrated monetary policy action is warranted to keep inflation expectations anchored, break the persistence of core inflation and thereby strengthen the medium-term growth prospects,” Das said, underlining the bank’s single-minded focus on bringing down inflation.

However, the quantum of hikes, which have reduced from 50 bps to 35 bps and now to 25 bps, coupled with Das’ comments that the impact of rate hikes so far has ‘not percolated’ suggests that RBI may pause for the time being.

“We expect a long pause from the RBI to allow for the cumulative 250 bps increase in the repo rate to filter through the economy. Needless to mention, interest rate hikes work with a lag effect of 2-3 quarters, so its full impact on growth has yet to be seen,” Ambani added.

To sum up, while cooler inflation and higher repo rates have resulted in real interest rates turning positive, Das has not declared victory against inflation. However, Das might take a pause to see the full impact of rate hikes flow through the economy before taking his next call.

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