Continued pause on policy rate to push growth, anchor inflation: Experts

Mumbai: The Reserve Bank of India's decision to continue the pause on policy rates will support growth while addressing inflationary pressures, experts said.

The RBI on Thursday opted for a pause second time in a row, maintaining key benchmark policy rate at 6.5 per cent as inflation moderates.

The rate increase cycle was paused in April after six consecutive rate hikes aggregating to 250 basis points since May 2022.

This pause will help growth to become strong with the support of enhanced consumption demand in the economy, said Saket Dalmia, President, PHD Chamber of Commerce and Industry.

"We look forward to the continuous handholding by the government and RBI to maintain economic growth and addressing inflationary pressures," he said.

Since May 2022, RBI had hiked the short-term lending rate (repo) cumulatively by 250 basis points to check inflation, before hitting the pause button in April.

Announcing the bi-monthly policy, RBI Governor Shaktikanta Das said anchoring of inflationary expectations is underway and that the central bank's monetary policy actions are yielding the desired results.

Suvodeep Rakshit, Senior Economist, Kotak Institutional Equities said the central bank staying on a pause and maintaining its stance were in line with expectations.

"The RBI continues to estimate average inflation slightly above 5 per cent for FY2024 and retained GDP growth at 6.5 per cent. We believe there are some downside risks to growth. We believe that rate cuts will be contingent on significant divergence in growth-inflation prospects," he said.

Welcoming the RBI's decision, Atul Banshal, Director-Finance, Omaxe Ltd said the central bank has displayed a growth-supportive policy stance.

"However, following a series of successive policy rate hikes, the real estate sector had anticipated some relief from the central bank in the form of a modest rate cut. Such a move would have bolstered demand and, subsequently, the overall economy," he said.

He further said the industry expects that the RBI will opt for a policy rate reduction in the next review meeting, providing a much-needed impetus to various sectors, including real estate.

The next meeting of the rate-setting panel, Monetary Policy Committee (MPC), is scheduled for August 8-10, 2023.

Bankbazaar.com CEO Adhil Shetty said by keeping the interest rate steady, RBI has exhibited its commitment to strike a delicate balance between addressing inflation concerns and supporting businesses and individuals in these challenging times.

"Inflation permitting, we may see rates drop before the end of 2023. If you’re on a repo-linked loan, your rate should automatically reset after any repo rate change within a quarter," he said.

Meanwhile, V Swaminathan, executive chairman, Andromeda sales and Apnapaisa.com opined that RBI's decision is a positive news for borrowers, especially considering the global apprehensions that persist in advanced economies.

It is encouraging to note that domestic macroeconomic fundamentals are strengthening, with resilient economic activities, moderated inflation, comfortable current account deficit, and robust credit growth, he said.

"If the situation persists or improves further, we can anticipate a potential rate cut in the next monetary policy review," Swaminathan added.

Ranen Banerjee, Partner, Economic Advisory Services, PwC India too said the MPC expectedly continued with the rate pause as the inflation prints have come well within the tolerance band of 2 to 6 per cent and growth concerns persist.

"The FY24 GDP growth rate projection of 6.5 per cent is more on the optimistic spectrum band as the number of downside risks listed are quite a many. The projected growth rate for Q1 at 8 per cent in FY24 is likely to get tested despite the holding up of demand in the first two months of the year," he said.

Jyoti Prakash Gadia, Managing Director, Resurgent India was of the opinion that RBI has chosen to assess, in the coming months, the complete impact of the repo rate hike of 250 basis points taken since May 2022 and then formulate its strategy for the future.

"The stance and broader outlook have also not therefore been changed by RBI at this stage to neutral till the inflation declines to an acceptable level. The overall RBI intentions to support growth while keeping a close vigil on the headline inflation is a welcome approach in the interest of the economy at this stage," he said.

The MPC meeting (June 6-8) took place against the backdrop of consumer price-based (CPI) inflation declining to a 18-month low of 4.7 per cent in April. The CPI for May is scheduled to be announced on June 12.

Sanjay Palve, Senior Managing Director, Essar Capital said the decision indicates RBI’s focus on maintaining stability and carefully withdrawing accommodative measures.

"We appreciate RBI's commitment to maintain a delicate balance between growth and inflation containment. While headline inflation remains above the target of 4 per cent, we believe that RBI's vigilant stance will contribute to necessary corrective measures, promoting price stability in the coming months," Palve said.

Meanwhile, on RBI's announcement on Priority Sector Lending (PSL) targets for urban cooperative banks, Karthik Srinivasan, Senior Vice President, Group Head - Financial Sector Ratings, ICRA said the proposal to allow more time to meet the targets shall reduce their PSL purchases and support their profitability in the interim.

On widening of the scope of the framework for resolution of stressed assets, he said the likely inclusion of non-banks in the framework can help improve their ability to resolve these assets and at a relatively lower haircut.

The government has mandated RBI to ensure CPI inflation at 4 per cent with a margin of 2 per cent on either side.

Indian economy grew 6.1 per cent in the fourth quarter of 2022-23, pushing up the annual growth rate to 7.2 per cent, as against 7 per cent anticipated earlier.