The Reserve Bank of India (RBI) has kept its key repo rate unchanged after six consecutive rate hikes, surprising the markets. The RBI stated that it was closely monitoring the impact of recent global financial turbulence and that its policy stance remains focused on “withdrawal of accommodation”, indicating that it could consider further rate hikes if necessary. RBI Governor Shaktikanta Das said that the pause in rate hikes was only for this meeting, and that the central bank’s job was not yet finished, and the war against inflation has to continue.
The central bank’s monetary policy committee (MPC), comprising three members from the RBI and three external members, decided to retain the key lending rate or the repo rate at 6.5%. Many analysts had expected the RBI to make one final 25 basis point hike in the current tightening cycle, which has seen it raise the repo rate by a total of 250 basis points since May last year.
Sakshi Gupta, principal economist at HDFC Bank, stated that the RBI could go on an extended pause throughout FY24, which refers to India’s fiscal year running from April through March. Some other central banks have also paused or indicated that they are ready to pause, such as the Reserve Bank of Australia, which held rates steady on Tuesday to evaluate the impact of past hikes but flagged that further increases may be necessary.
While RBI has decided to pause rate hikes due to global macroeconomic and financial conditions, “our job is not yet finished and the war against inflation has to continue,” stated Governor Das, reiterating the resolve to bring inflation back within the central bank’s target range of 2% to 6%. Retail inflation rose to 6.44% year-on-year in February, easing from 6.52% in January but remaining above RBI’s mandated target range for 10 out of the last 12 readings.
Aditi Nayar, chief economist at rating agency ICRA, said that financial stability concerns appeared to have prompted the pause in rate hikes. However, if inflation does not fall in line with the MPC’s assessment, “another hike could be in the offing, especially if the financial stability situation stabilizes,” Nayar added. The decision to hold interest rates steady was unanimous, in contrast to the previous decision when four members had voted for a rate hike.
After the surprise RBI decision, government bond yields crashed. The 10-year benchmark 7.26% 2032 bond yield dropped to 7.14%, the lowest level since September 15 immediately after the policy announcement, against 7.28% before the decision. As of 10:20 am (04:50 GMT), the yield was at 7.18%. The central bank expects inflation to be at 5.2% in 2023-24, and GDP growth is projected to be 6.5% in the financial year beginning April 1.
