RBI may stop rate hike

Economists said the RBI is widely expected to start tightening monetary policy only later this year, and given the changed geopolitical situation since the last meeting of the Monetary Policy Committee (MPC) in early February. There will be no immediate rate change. Russia’s attack on Ukraine last week threw global and domestic markets into turmoil and Brent crude soared to $100 a barrel, raising fears of inflation.

In a surprise move, the monetary policy panel at its February meeting kept policy rates unchanged even as global central banks raised rates to combat post-pandemic inflation. The divergence with other central banks on rates stems from the RBI’s belief that India’s inflationary character is slightly different from that of other economies. However, RBI Governor Shaktikanta Das told the MPC meeting that since inflation is expected to calm down in the next fiscal, there will be room for adjustment in monetary policy.

“We reiterate that such a silly message on inflation makes it difficult to envisage RBI’s rate hike in the near term,” Barclays economists said in a note to clients on February 24.

Barclays said the RBI would likely prefer only a gradual path of policy normalisation. Barclays said, “While the RBI may choose to normalize the policy corridor over the next six months, we expect the repo rate hike to start only from the Q3 2022-August meeting – and with the risk of delay.”

According to economists at Emkay Global Financial Services Ltd, policy makers may not react immediately through the interest rate channel. It added that the indication of tough policy in the MPC meeting and generally sluggish minutes mean that the RBI will go slow on policy change. “We believe that the RBI has some policy flexibility, which will delay the hike in the repo rate,” MK said.

For some time now, the RBI has recognized that supply-side constraints are driving domestic inflation, and when the bottlenecks ease, the pace of inflation will slow down. In the February meeting, Das once again said that inflationary pressures in India stem largely from supply-side factors. Backing this view, Deputy Governor Michael Patra said that the inflation of the pandemic is not driven by excess demand but by supply constraints.

Others believe that given the change in the situation in the last 15 days, the time has come for the central bank to act. Also, given that India meets 85% of its oil demand through imports, a rise in crude oil prices will fuel inflation.

“Given the fact that there are conditions which have changed in the last 15 days, there is a strong case for RBI to revisit the assumptions made at that particular point of time. Madan Sabnavis, chief economist at Bank of Baroda, said it was assumed that oil prices would be an issue, then it was not taken very seriously, due to the recent geopolitical tensions and $100 a barrel of crude oil. This idea has changed because of the reach.