New Delhi February 8 2023: India’s central bank slowed the pace of interest-rate increases for a second straight meeting, while allowing itself more room to tighten borrowing costs going ahead to rein in stubbornly high core inflation.
The Reserve Bank of India’s six-member Monetary Policy Committee voted 4-2 to raise the benchmark repurchase rate by a quarter-point to 6.50%, as predicted by 35 of 40 economists in a Bloomberg survey. The panel retained its stance of withdrawing accommodation, which was adopted early last year.
The “MPC will continue to maintain strong vigil on inflation,” Governor Shaktikanta Das said in a livestreamed address from Mumbai on Wednesday. The stance is warranted to keep inflation expectations anchored and break the persistence of core inflation, he said.
Bonds fell, with the yield on benchmark 10-year bonds rising by as much as four basis points to 7.36%, as the policy likely belied expectations of a dovish pivot. The rupee traded higher, while stocks surged 0.7%.
While headline consumer prices have returned to the central bank’s 2%-6% target band, the RBI’s sixth consecutive hike since May is aimed at tamping down core inflation, the measure that strips out volatile food and fuel costs, which has stayed above 6% for the past 15 months. Keeping the current policy stance will allow policymakers room to raise borrowing costs some more, akin to peers in the US who are talking of the possibility of a higher peak rate.
“Sticky core inflation is still a concern for RBI not letting it change the stance,” said Gopal Tripathi, president and head of capital markets at Jana Small Finance Bank. “No change in stance keeps option open for further hike.”
With India set to grow at the quickest pace among major economies in the year beginning April, and the government resolute on fiscal consolidation, the RBI can afford to stay focused on its primary mandate of price stability.
The RBI forecast inflation to average at 5.3% in the year beginning April, from a revised 6.5% in the current fiscal year. It sees economic growth at 6.4% in the same period, against 6.8% seen in current year ending March.
“The global economic outlook does not look as grim now as it was a while ago,” Das said, noting that inflation is what remains a worry for some major economies.
The central bank appears to be deriving comfort from strong growth to move the needle on monetary conditions, although the downward shift in inflation will likely tone down their hawkishness in the future, said Rahul Bajoria, an economist at Barclays Plc.
--With assistance from Vrishti Beniwal, Tomoko Sato, Shwetha Sunil, Jeanette Rodrigues, Adrija Chatterjee, Ronojoy Mazumdar and Kartik Goyal.