Pause on rate hike is ok, but for how long?

Falling on expected lines, the RBI MPC maintained the status quo on the repo rate and thereby its accommodative stance. The MPC maintained its FY24 real GDP growth projection while marginally revising its inflation estimate. The RBI seems to be focusing back on the inflation target of four per cent, and the policy outlook will hinge on providing a glide path toward this target. Analysts retain their view of an extended pause, when the MPC reviews the annual monetary policy in August. The panel was unanimous in the decision to hold the repo rate at 6.5 per cent. It remained focused on the withdrawal of accommodation with a 5-1 majority (barring Dr Varma). The decision likely reflects the MPC’s continuing concerns about inflation amid monsoon uncertainties while retaining its optimism on the growth front. It is despite the fact that risks to the growth outlook are more from the global side. Secondly, despite a week’s delay, the Met department has forecast a normal monsoon in the current fiscal.

The MPC revised down its current fiscal’s inflation estimate marginally to 5.1 per cent (from 5.2 per cent). The MPC noted that the inflation trajectory is likely to be shaped by food price dynamics. The estimates were based on corrections in wheat prices, assumptions of a normal monsoon and easing crude oil prices. Still, concerns remain about sticky milk prices, risks to the spatial and temporal distribution of the monsoon and crude oil price uncertainty. The MPC retained its FY24 real GDP growth projection at 6.5 per cent with some marginal revisions to the quarterly estimates. This was based on strong rabi production, sustained buoyancy in the services sector and improved activity due to the Centre’s capex thrust. The panel took note of the downside risks stemming from weak external demand, geo-economic fragmentation and continuing geopolitical conflicts.Around Rs1.8 trillion, out of Rs 3.6 trillion outstanding by way of Rs 2,000 bank notes taken out of circulation, of which Rs 1.5 trillion is in bank deposits. The liquidity will remain in surplus, at least over the next few months.

Given the surplus liquidity in the system and the prospects of it staying in surplus, we see a lower probability of a CRR cut or OMO purchase, as expected earlier.Kotak Institutional Equities maintains its view of an extended pause by the RBI MPC. The RBI seems to be focusing back on the inflation target of 4 per cent. The policy outlook will hinge on providing a glide path toward this target. Experts do not see inflation durably settling around 4 per cent in the next few quarters. These are the factors on why analysts expect the RBI MPC to remain on an extended pause in the current fiscal as it evaluates the inflation-growth dynamics. That brings us back to the million dollar question-for long can this pause on rate hike continue.