Instant View: India holds key rate in surprise decision, keeps door open for more hikes

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Instant View: India holds key rate in surprise decision, keeps door open for more hikes

April 6 (Reuters) - The Reserve Bank of India (RBI) surprised markets by holding its key repo rate steady on Thursday after six consecutive hikes, saying it was closely monitoring the impact of recent global financial turbulence.

The central bank said its policy stance remains focused on "withdrawal of accommodation", signalling it could consider further rate hikes if necessary. The pause in rate hikes is "for this meeting only", said RBI Governor Shaktikanta Das.

Most analysts had expected one final 25 basis point hike in the RBI's current tightening cycle, which has seen it raise the repo rate by a total 250 bps since May last year.


Enough (tightening) might be enough was the overarching message from the RBI in the April meeting. We were out of consensus in forecasting that the RBI would pause and keep stance at 'withdrawal of accommodation' - which is exactly what was delivered.

In our view, this reflects a forward looking monetary policy that takes into cognisance elevated global growth risks, moderating inflation trajectory, and the need to wait-and-watch and assess the impact of the sharp policy tightening already delivered.

We maintain our view of 75bp of rate cuts, starting from October.

GARIMA KAPOOR, ECONOMIST, INSTITUTIONAL EQUITIES, ELARA CAPITAL, MUMBAIWe see today's action as a breather in this rate hike cycle with financial stability taking precedence amid global bank failures and associated tight financial conditions. With stance remaining unchanged, MPC has now become data dependent.

We believe the bar for future rate hikes has increased, especially since near-term prints of CPI will be sub 6%. We expect FY24 CPI to range between 5.2-5.5% in FY24E and GDP growth at 5.7%-5.8% in FY24E.

Key risk to watch out for would be food price rise amid inclement weather conditions and movement in global oil prices.

The decision to pause at 6.5% was a positive surprise. We believe the RBI is concerned about the uncertainty in global financial markets and the pause is reflective of this concern. We view this policy as a hawkish pause. The tone of the policy remains concerned about inflation, especially core inflation and remains focused on reaching the 4% target over the medium term.

The RBI remains comfortably on the growth front, for now. We believe the risks to this outlook is skewed towards the downside. We expect the RBI MPC to remain on an extended pause. Scope for further hikes is limited given our growth-inflation outlook and impact of the past rate hikes on the the same.ANJALI VERMA, CHIEF ECONOMIST AND CO-HEAD RESEARCH, PHILLIPCAPITAL INDIA, MUMBAI

Uncertainty led to RBI taking a pause along with maintaining reversal-of-accommodation stance. While growth forecasts have been left unchanged, we expect growth to slowdown to 5.5-6% in FY24. The RBI's decision reflects that RBI is acknowledging growth softness along with inflation concerns (is) not that strong anymore.

SUJAN HAJRA, CHIEF ECONOMIST AND EXECUTIVE DIRECTOR, ANAND RATHI SHARES AND STOCK BROKERS, MUMBAIWith inflation still elevated and most major central banks hiking rates recently, chance of a 25 bps rate hike was considerable. The RBI opting for a pause seems to suggest that the central bank expects softer inflation and growth. With this, it seems that the RBI has come to the end of rate hike for this cycle. Unless there was a big surprise either on inflation or growth, we expect the RBI to remain in pause mode during 2023.

Following in the footsteps of some recent global policy announcements (like the RBA), the RBI unanimously delivered a hawkish pause. Growth was revised up to 6.5% while inflation estimates were revised down.

However, the governor highlighted that they will not refrain from taking further action if required, especially in light of the recent increase in oil prices and given core inflation remains elevated.

We could see the RBI now going on an extended pause throughout FY24 while liquidity conditions continue to tighten. Short term yields could therefore continue to see some pressure.

Financial stability concerns appear to have pre-empted a pause as the MPC assesses the impact of its cumulative 250 bps of rate hikes. If inflation does not fall in line with the MPC's assessment for Q1 FY2024, another hike could be in the offing, especially if the financial stability situation stabilises.

The RBI MPC surprised with a pause on Thursday but emphasised that the path ahead will be nimble to address evolving inflationary risks and maintained its hawkish stance. Tone on growth was upbeat, validated by a small upward revision to the FY24 growth target.

Oil projection was cut, besides factoring in the assumption of a normal monsoon. With policymakers highlighting risks to global financial stability, the tightening cycle has likely slipped into an extended pause, barring unexpected shocks. Beyond anchoring inflationary expectations, the impact of tighter monetary policy on supply-side shocks, especially poor weather conditions, is limited, instead requiring administrative measures and fiscal support.

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