India's Central Bank Halts Policy Tightening

The Reserve Bank of India left its key interest rates unchanged on Thursday, while markets widely expected the bank to move in tandem with its major counterparts. Nonetheless, the RBI kept the door open for more tightening if situation warrants.  

The six-member Monetary Policy Committee, led by the RBI Governor Shaktikanta Das, unanimously voted to keep the repo rate unchanged at 6.50 percent. Markets had expected a quarter-point increase in the key policy rate.

The bank has now raised the repo rate cumulatively by 250 basis points in the last eleven months starting May 2022.

The standing deposit facility rate was left unchanged at 6.25 percent and the marginal standing facility rate and the Bank Rate, both at 6.75 percent.

Das said the central bank will keep a strong vigil on the evolution of inflation and growth. Policymakers will not hesitate to take further action as may be required in upcoming meetings, he added.

“The decision to pause on the repo rate is for this meeting only,” Das said.

The RBI chief stressed on the need to assess the cumulative impact of past rate hikes.

The governor said the decision to pause the rate was taken on the basis of assessment of the macroeconomic and financial conditions with reference to available information.

“Overall, inflation is above the target and given its current level, the present policy rate can still be regarded as accommodative,” Das said.

The MPC voted 5-1 to remain focused on withdrawal of accommodation to ensure that inflation progressively aligns with the target, while supporting growth.

The bank forecast headline inflation to moderate in 2023-24. The RBI downgraded its inflation outlook to 5.2 percent from 5.3 percent.

Projections for 2023-24 point to a softening in inflation, though the disinflation is likely to be gradual and protracted, given the rigidity in core inflation pressures, Das said.

Policymakers observed that the economic activity remains resilient and real GDP growth is expected to have been 7.0 percent in 2022-23.

At the same time, real GDP growth projection for 2023-24 was upgraded to 6.5 percent from 6.4 percent.

In the latest forecast released Wednesday, the Asian Development Bank forecast India’s economic growth to slow to 6.4 percent in 2023 and 6.7 percent in 2024.

Elsewhere, the World Bank cut its FY23/24 GDP forecast for India to 6.3 percent from 6.6 percent as growth is expected to be constrained by slower consumption growth and challenging external conditions.

Given the subdued growth outlook and the likelihood that inflation falls back to within the RBI’s target range before long, the tightening cycle has come to an end, Capital Economics’ economist Shilan Shah said.

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