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

RBI closely monitoring the impact of recent global financial turbulence

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 on the economy.

The central bank said its policy stance remains focused on “withdrawal of accommodation”, signalling it could consider further rate hikes if necessary.

“It is a pause, not a pivot,” RBI Governor Shaktikanta Das said at a media conference after the monetary policy announcement.

The monetary policy committee (MPC), comprising three members from the central bank and three external members, retained the key lending rate or the repo rate at 6.50 per cent.

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.

“We expect the RBI to maintain an extended pause and evaluate the lagged impact of previous rate hikes and global uncertainties on growth-inflation dynamics,” said Upasna Bhardwaj, chief economist at Kotak Mahindra Bank.

Some other central banks have similarly paused or indicated they are ready to pause, such as the Reserve Bank of Australia, which held rates steady on Tuesday in order to assess the impact of past hikes but flagged further increases may be necessary.

“We have to be extremely prudent in our actions,” Das said in his statement.

While the central bank has taken the decision to pause rate hikes in light of global macroeconomic and financial conditions, “our job is not yet finished and the war against inflation has to continue”, Das said, reiterating the resolve to bring inflation back within the central bank’s target band of 2 per cent-6 per cent.

Retail inflation rose 6.44 per cent year-on-year in February, easing from 6.52 per cent in January but has remained above the central bank’s mandated target range for 10 out of the last 12 readings.

The central bank sees inflation at 5.2 per cent in 2023-24, and GDP growth is seen at 6.5 per cent in the financial year beginning April 1. “With unyielding core inflation, we remain firm and resolute in our pursuit of price stability which is the best guarantee for sustainable growth,” said the committee in its statement. “The impact of our actions over the past 12 months is still playing out and would increasingly weigh on the future inflation trajectory.”

Financial stability concerns appear to have prompted the pause in rate hikes, said Aditi Nayar, chief economist at rating agency ICRA. However, if inflation does not fall in line with the MPC’s assessment and financial turmoil stabilises, “another hike could be in the offing”, Nayar said.

The decision to hold interest rates steady was unanimous in contrast to the last decision when four members had voted for a hike in rates.

Five of the six committee voted in favour of continuing with the stance of “withdrawal of accommodation”, while one member dissented.

“Retaining the stance at removal-of-accommodation also signals a continued focus on steadily guiding inflation down towards the 4 per cent target,” said Saugata Bhattacharya, chief economist at Axis Bank.

Government bond yields fell sharply after the surprise RBI decision. The 10-year benchmark 7.26 per cent 2032 bond yield dropped to 7.1469 per cent, the lowest level since Sept. 15 immediately after the policy announcement, against 7.2857 per cent before the decision. The yield was at 7.20 per cent as of 11.41am IST (0611 GMT).

“We expect domestic bond yields to remain range-bound till clarity over future direction of policy rates emerges,” said Churchil Bhatt, debt fund manager at Kotak Mahindra Life Insurance Company, adding the expected range was 7.10 per cent-7.40 per cent.

The Indian rupee declined marginally against the US dollar. The rupee was at 81.98 to the dollar against 81.88 prior to the policy announcement.