“He who is prepared for the future, and he who deals cleverly with any situation that may arise, are both happy,” said Chanakya, one of the most versatile political-economic strategists in the world.
With the pause and proceed approach in the policy rate hikes accompanied by a substantiating and smoothening commentary, Reserve Bank of India (RBI) Governor Shaktikanta Das has shown that he is both prepared and ready to act.
As against a widely expected hike of 25 basis points (bps) in repo rate, the RBI has chosen financial stability and economic growth as against the global trend of sustained rate hikes.
The central bank, however, is also benefited by a mildly softer inflationary outlook or a manageable inflationary trajectory, improving current account deficit, a stronger economy than the rest of the world and a general perception that central banks, including the US Federal Reserve, may hit the pause button sooner.
The inflation had slowed marginally to 6.44 per cent in February from 6.52 per cent in January, though it is still above the mandated tolerance level. However, the RBI has taken cognisance of the favourable base effect of the good 80-bps since March, on inflation, with an intent to keep the real rates positive.
The decision to hold on to the status quo has galvanised the bond market with yields softening by over 10 basis points across the curve. Previous hikes have already brought the systemic liquidity to pre-Covid levels, drying out much of the surplus. While we will have to wait and watch how India Inc. plans its future course of action on capex, the uncertainty of rate hike is behind us.
No doubt, inflation remains stubborn and entrenched, and is being shadowed by a potential spiral in crude prices following the alarming OPEC+ output cut, while domestically, the monsoon may turn patchy, hurting the food prices. The projected real GDP growth of 6.5 per cent for FY24 seems very optimistic in an environment when global uncertainties are weighing heavily on world’s growth prospects.
Globally, the emerging consensus is that central bankers must plan their moves with lot more clarity, and that too, in consultation with the broader market. Many economists are concerned that central bankers are suppressing demand and lowering wages, not just by raising rates, but also by not doing enough analysis and oversight which can lead, according to them, to banking failures and a greater global financial instability.
Here, the RBI seems to have taken the right call to pause the rate hikes with a better insight into the evolving scenario, giving ample time for the cumulative hikes to play out. As the data shows, the private consumption is slowing down – due to rising borrowing costs and slower income growth, and some moderation is expected in core inflation numbers, progressively.
But as the governor underlined, the central bank is fully loaded and ready to fire at any time if the scenario changes.
The author is the president and head – wholesale bank, Kotak Mahindra Bank
(Disclaimer: Views expressed are the author’s own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.)