RBI minutes: Shaktikanta Das says pause in repo rate tactical not pivot as fight against inflation far from over

RBI has hinted towards the possibility of more rate hikes ahead in the latest minutes of the MPC meeting which was released on Thursday. This would be for April 2023 policy. On the latest pause in repo rate, governor Shaktikanta Das said, it is tactical and not a pivot or a change in policy direction. He believes the fight against inflation is far from over.

In a surprise move, in the first bi-monthly monetary policy of FY24, RBI kept the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 6.50%. Subsequently, it also kept the standing deposit facility (SDF) rate unchanged at 6.25%, while the marginal standing facility (MSF) rate and the Bank Rate were also unchanged at 6.75%.

However, RBI did not change its policy stance and remained focused on the withdrawal of accommodation to ensure that inflation progressively aligns with the target while supporting growth.

All MPC members voted for pause in rate hike in April 2023 policy. 

In the MPC meeting's minutes, Shaktikanta Das said, "Since the last meeting of the MPC in February 2023, the global economic environment has changed dramatically."

He added, "While issues of geopolitics and high inflation continue to impact the outlook, the emergence of banking sector turmoil on both sides of the Atlantic and the sudden announcement of oil production cut by the OPEC+ countries have rendered the global outlook even more uncertain. Global inflation is easing but at a tardy pace. Central banks face a runway which is becoming narrower and bumpy for soft-landing."

Talking about the cumulative impact of monetary policy actions over the last year, Das said, "is still unfolding and needs to be monitored closely. Inflation for 2023-24 is projected to soften, but the disinflation towards the target is likely to be slow and protracted."

The projected inflation of 5.2% for Q4 of FY24, would still be well above the target.

Therefore, Das said, "At this juncture, we have to persevere with our focus on bringing about a durable moderation in inflation and at the same time give ourselves some time to monitor the impact of our past actions. I am, therefore, of the view that we do a tactical pause in this meeting of the MPC."

Accordingly, he added, "This is a tactical pause and not a pivot or a change in policy direction. We will continue to monitor all incoming information and undertake a forward-looking assessment of the evolving economic outlook and stand ready to act, should the situation so warrant. Our fight against inflation is far from over and we have to continue with our efforts to bring down inflation closer to the target over the medium term."

The possibility of more rate hikes by RBI cannot be ruled hence.

On the other hand, MPC member Dr. Ashima Goyal believes that there is no logic in overshooting policy rates and then cutting in a country such as India where the largest impact of the interest rate is on growth, the relation between expected rupee depreciation and interest rates is weak, many tools are available to reduce excess volatility of the exchange rate and have been successfully used, the current account deficit has reduced and its financing is no longer an issue.

Moreover, the exchange rate is not directly included in the mandate of the MPC, Goyal added.

But Goyal also said, "Because of erratic weather and continuing global uncertainties, and until it is clear that inflation is well on the path to reaching the target, it is necessary to emphasize that this may not be the end of the rate hikes."

Since May 2022 to April 2023 policy, MPC members have raised the repo rate by 250 bps.