The RBI is likely to support economic growth, while keeping all options open to arrest inflationary expectations
The Reserve Bank of India-led Monetary Policy Committee (MPC) sprang a surprise on people by pausing the expected repo rate hike. Though RBI governor Shaktikanta Das made it clear that it was a temporary pause, the decision brought cheer to borrowers and investors.
The pause is a welcome decision as it would allow monetary authorities to review the impact of the repo rate hike and avoid the risk of over-tightening. The MPC had increased the repo rate — the interest rate that RBI charges to lend money to banks — by 250 basis points in six sessions over the last one year — which increased the rate from four per cent in May 2022 to the current 6.5 per cent.
The overnight rate — that banks pay for short-term borrowings — has risen by approximately 320 basis points over the past year, which was passed on loan rates, wreaking havoc on family budgets of people from the middle class.
On the inflation front, the Central bank revised consumer price index based retail inflation to 5.2 per cent for FY24, notwithstanding tightening crude oil supply and weakening of capital inflows that could exert pressure on the rupee. The economic growth projection was revised upwards to 6.5 per cent, despite global geopolitical uncertainty and the looming threat of recession in the United States market, which is one of India’s key trade partners.
Though the RBI kept the door open for further policy actions if warranted, analysts believe that the bar for future rate hikes has moved higher and the country may witness a prolonged pause phase to support the faltering economic growth. Unless some dramatic adversarial events happen, the RBI is likely to support economic growth, while keeping all options open to arrest inflationary expectations.