A HAWKISH PAUSE

The MPC threw a surprise by keeping repo rate unchanged in its April review. Does this pause signify the end of the rate hike cycle in India?

The six-member monetary policy committee (MPC) - the interest rate-setting body of the Reserve Bank of India (RBI) - left the policy rate unchanged in its April review. All six members voted in favour of keeping the policy repurchase rate (repo) unchanged at 6.5%. On the contrary, the markets were expecting the repo rate to be hiked by a minimum of 25 basis points.

The repo rate is the interest rate at which banks borrow from the RBI during times of tight liquidity in exchange for government securities as collateral. This way liquidity is injected into the system at the repo rate. The repo rate influences all other interest rates in the system like banks’ lending and borrowing rates. It also influences yields on government and corporate bonds.

In the current interest rate tightening cycle, the MPC hiked the repo rate, which stood at 4% in May ’22 to 6.5% (250 basis points hike) now. While the quantum of rate hikes had begun to taper in the recent policy reviews, a pause in April was unexpected.

To point out, the MPC has the mandate to tame inflation at the 4% level with a band of 2% on either side. The MPC must also support economic growth, but targeting inflation remains the priority. A pause in repo rate hike signifies that the inflation is in a comfortable zone, while economic growth needs some monetary policy support.

Why has the MPC pressed the pause button? And what is the monetary policy outlook in the near-to-medium term?

IMPACT ASSESSMENT

After continuous repo rate hikes since May ’22, the time was right for the MPC to assess the outcome of the previous actions. Even though the repo rate was hiked by 250 basis points, bond markets, over the period, had factored in even larger policy rate hikes.