6 Apr 2023
After aggressively raising key interest rates six times in the last 11 months, the Reserve Bank of India today kept the benchmark lending repo rate unchanged at 6.50 per cent. The RBI's six-member monetary policy committee (MPC) unanimously decided to hit the pause button on the key interest rates, taking markets mainly by surprise.
RBI has hiked the rates by 250 basis points since May last year to tame the high inflation, which has relentlessly stayed above the RBI comfort zone.
The decision to keep the rates steady this time was driven by the following two factors:
- While there have been indicators suggesting improvement in global economic activity, the world is now witnessing a renewed phase of turbulence with the banking sector crisis in some advanced economies.
- Headline inflation is moderating but remains well above the targets of central banks.
Here are some key takeaways from the RBI policy announcement today:
- While concerned over the crisis in the banking sector in some of the developed countries like the United States as well as 'heightened volatility' in the financial markets, RBI observed that "the banking and non-banking financial service sectors in India remain healthy and financial markets have evolved in an orderly manner".
- While the rates remain unchanged, RBI will keep a close watch and 'will not hesitate' to take further action if required.
- While the core inflation remains above the target, RBI expects headline inflation to moderate in 2023-24 financial year. RBI has lowered inflation projections from 5.30% to 5.20% for the current fiscal with risk evenly balanced.
- Economic activity remains resilient, and real GDP growth is expected to be 6.5% in the current fiscal, up from an earlier estimation of 6.4% based on improving prospects for the agriculture sector and rural demand, government focus on capital expenditure, among other factors.
- According to RBI, the Indian Rupee has moved in an orderly manner in the calendar year 2022 and will continue to be so in 2023 also. This, the central bank said "is reflective of the strength of domestic macroeconomic fundamentals and the resilience of the Indian economy to global spill overs".
View from Kotak Mahindra Mutual Fund on today's policy decision
The RBI decision is likely a "hawkish pause", indicating that the rate tightening cycle is not over. However, the interest rates seem to have nearly peaked, and bond markets have reacted positively to RBI's decision.
Source: Kotak Mahindra Asset Management Company Limited internal research
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