The rate-setting committee of the Reserve Bank of India (RBI), known as the Monetary Policy Committee (MPC), hasn’t surprised anyone by keeping its finger on the pause, keeping the policy repo rate at 6.5 percent, and sticking to its stance of withdrawal of accommodation. This indicates that the RBI believes there is still too much liquidity in the system, and that the central bank needs to keep it tight to check inflation.
In spite of this, several financial experts anticipated that the MPC would vote differently on the attitude, even if it didn’t change to neutral, since the inflation rate has been falling. “While the monetary policy committee might vote unanimously to keep rates unchanged, the decision to extend the stance could see a split as the doves would prefer to close the door on further tightening as inflation beats a retreat,” Radhika Rao, an economist at DBS Bank, said in a note dated June 5 that “while the committee might vote unanimously to keep rates unchanged, the decision to extend the stance could see a split.”
A neutral position will suggest that the RBI can increase, stop, or cut at a future stage, as prompted by the data and transmission delays, an economist from Deutsche Bank AG named Kaushik Das told Bloomberg. “A neutral stance will signal that the RBI can hike, pause, or cut at a future stage.”
Why not just be impartial?
Following a series of incremental increases in the repo rate over the course of almost an entire year, the MPC decided to put a hold on further rate increases at their meeting in April. Jayanth Varma, who is one of the most vociferous rate-setters in the group, raised doubts on this matter, despite the fact that five of the organization’s members had chosen to continue concentrating on the withdrawal of housing. Nothing has changed in that regard. The same five members voted once again to stay focused on removal of accommodation in order to ensure that inflation gradually matches the objective while supporting growth. Varma once again raised misgivings on this aspect of the resolution.
A change in posture would have heightened expectations of a pivot in the near future, but it does not seem probable that there will be a rate decrease anytime soon given the unpredictable influence that weather may have on food prices. According to Rao of DBS Bank, the action taken by central banks across the world demonstrates vigilance on inflation as well as financial stability threats. This is in response to the Australian meteorological bureau’s decision to increase the likelihood of an El Nino event occurring.
