Why RBI went on the backfoot on rate hikes

  • 31 Jul 2023
  • Read 4 mins read

Putting things into context

As recession and slowdown loom upon the world, a major risk that economies have tried to alleviate is the risk of surging inflation. Hawkish interest rate policies were adopted by central banks across the world. This included the US Fed, Bank of England and even the Reserve Bank of India. However, in the April 2023 monetary policy, announced on 06th April, the RBI announced kept the repo rates unchanged at 6.50%. That was a pleasant surprise; but why?

 

Why this sudden pause in hikes?

There is a joke in financial markets that if you laid all the economists in the world from end to end, they would still not reach a conclusion. In a Bloomberg survey, only 6 out of 33 top economists had bet on flat rates with the other 27 pegging rates higher. However, RBI governor Shaktikanta Das has clarified that this was a pause and not the end of the war against inflation. 

However, India was not alone in hitting the pause button. Other emerging market economies like Indonesia, Malaysia and South Korea having also decided to tone down the hawkishness of central banks. In a way, the RBI has purchased time as this interim period will enable the RBI to efficiently evaluate the overall impact of the 250 bps hike in repo rates on curtailing inflation. Consumer inflation has been consistently above the RBI comfort zone of 6%. 

Were the Indian markets excited by this pause?

This policy infused a general sense of positivity within the economy and in the stock markets. After all, a pause in rate hikes means the pressure on net margins of Indian companies reduces and also it alleviates pressure on the interest coverage ratios. Solvency is likely to start looking a lot better for Indian companies in the days ahead. In the last few weeks, industry and trade bodies had been urging the RBI to go slow on rate hikes. On the latest status quo decision, the consensus is that the RBI has made the right call by being patient even as the global market is volatile. While an upside risk to inflation exists due to uncertainties around oil prices and monsoon performances, it is wiser to be safe than sorry by pushing monetary tightness at all costs.

Global banking crisis could worsen

The likes of Jamie Dimon of JP Morgan have highlighted that the global banking crisis may have been temporarily subdued, but it was far from over. The banking crisis that afflicted the likes of SVB Bank and Signature Bank was partly due to bad asset decisions and partly due to higher interest rates resulting in capital losses in the bond portfolio. While in India, there is not much of a banking crisis, the pressure on corporate bottom lines and their solvency ratios is building up. That was the big reason for the RBI to pause on rate hikes. RBI has stayed steady on rates despite Fed hawkishness. Just goes to show that RBI is willing to chart its own monetary path!

Source : Live Mint