A cautious pause, rate cut not anytime soon

In the aftermath of the pandemic, the RBI was tolerating inflation at the higher end of the band. Now, the focus is on bringing it down to the 4% target

Remember Jonty Rhodes’ famous run-out of Pakistan’s Inzamam-ul-Haq at the 1992 Cricket World Cup at Gabba in Brisbane? Looking at Rhodes’ action on the field, the commentators wondered: Is it a bird? Is it a plane?

Similarly, analysts are trying to dissect the successive pause on the policy rate front by the Reserve Bank of India (RBI). The questions they are asking: Is it a dovish pause? Is it a hawkish pause?

While pressing the pause button in April, RBI Governor Shaktikanta Das had said, “It’s a pause, not a pivot.”

This had made April’s pause a hawkish one. This time, I would say, it’s a cautious pause.

In a post-policy interaction with the media in 2014, then-governor Raghuram Rajan said, “We are neither hawks nor doves. We are owls.” His then deputy, in charge of the monetary policy, Urjit Patel, had chipped in, saying, “An owl is traditionally a symbol of wisdom. So we are neither (doves or hawks), but owls. We are vigilant when others are resting.”

Almost in a similar fashion, Das repeatedly emphasised the RBI’s vigilance on the inflation trajectory. The annual Consumer Price Index (CPI) inflation rate in India slowed sharply to an 18-month low of 4.7 per cent in April, from 5.7 per cent in March.

But the RBI is not in the mood to celebrate that.

In the aftermath of the pandemic, it was tolerating inflation at the higher end of the band. Now, the focus is on bringing down the inflation to the 4 per cent target, on a durable basis to ensure sustainable growth. This makes this policy diffe­rent from the earlier one.

“We need to move towards our primary target of 4 per cent inflation,” the governor has said.

The RBI’s flexible inflat­ion target is 4 per cent plus/ minus 2 percentage point.

For the record, there’s no surprise in the outcome of the three-day meeting of the RBI’s rate-setting body — the monetary policy committee (MPC). The repo rate remained unchanged at 6.5 per cent by a consensus 6-all decision. There is no change in the stance on the withdrawal of accommodation. In this case, the decision is not unanimous; one MPC member (J R Varma) is in favour of the withdrawal of accommodation.

The RBI sounds more confident in this policy.

“Unlike the previous three tumultuous years”, it sees “the uncertainty on the horizon appearing comparatively less and the path ahead somewhat clearer”.

It also highlights that “the Indian economy and the financial sector stand out as strong and resilient in a world of unprece­dented headwinds and swift cross-currents”.

However, the RBI doesn’t want to let its guard down as the headline inflation is still above the target and is expected to remain so, according to its projections for 2023-24 (FY24). This is why, “close and continued vigil on the evolving inflation outlook is necessary, especially as the monsoon outlook and the impact of El Niño remain uncertain”.

Showing cautiousness, the governor has made it clear that the pause is meant only for this meeting and further monetary actions will be taken promptly and appropriately as required to keep inflation expectations firmly anchored and bring down inflation to the target.

The pause is what every­body had expected; a few had expected a tweak in the stance of the policy. The RBI has not done that. Why?

The reason is surplus liquidity in the system. It could rise even further as more and more Rs 2,000 banknotes get deposited in banks. Until now about 50 per cent of the Rs 2,000 banknotes (Rs 1.8 trillion of Rs 3.62 trillion in circulation in March) have been deposited. The window for depositing such notes closes on September 30.

The RBI has committed to remain nimble in its liquidity management, ensuring that adequate resources are available for growth and the orderly completion of the govern­ment’s record Rs 15.43-trillion gross market borrowing programme in FY24.

The RBI has left its estimate for the real gross domestic product growth for the year unchanged at 6.5 per cent but tweaked the quarterly growth projec­tio­ns — raising it in two quar­ters and paring it in two.

When it comes to CPI inflation, it has pared it marginally from 5.2 per cent estimated in April to 5.1 per cent. However, there could be a 10-12-basis point (bp) impact on the estimate on account of the hike in the minimum support price of paddy, announced on Wednesday, even though part of the hike has already been built into the proje­cti­on. One bp is one-hundr­edth of a percentage point.

There is no doubt that we have reached the end of the rate-hike cycle. When will we see the first rate cut? Not any time soon.

While risks to near-term inflation have moderated, pressure remains during the second half of the year. The RBI will watch that closely before biting the bullet.

The writer is an author and senior advisor to Jana Small Finance Bank Ltd. His latest book is 'Roller Coaster: An Affair with Banking'

To read his previous columns, log on to https://bankerstrust.in

Twitter: @TamalBandyo