- RBI holds repo rate at 6.50%
- Analysts had expected one more hike of 25 bps
- RBI sees "war against inflation" continuing
- Bond yields crash
According to Reuters article published on April 6, 2023, the Reserve Bank of India (RBI) surprised markets by holding its key repo rate steady on Thursday after six consecutive hikes, saying it was closely monitoring the impact of recent global financial turbulence.
The central bank said its policy stance remains focused on "withdrawal of accommodation", signalling it could consider further rate hikes if necessary. The pause in rate hikes is "for this meeting only", said RBI Governor Shaktikanta Das.
The monetary policy committee (MPC), comprising three members from the central bank and three external members, retained the key lending rate or the repo rate (INREPO=ECI) at 6.50%.
Most analysts had expected one final 25 basis point hike in the RBI's current tightening cycle, which has seen it raise the repo rate by a total 250 bps since May last year.
"We could see the RBI now going on an extended pause throughout FY24," said Sakshi Gupta, principal economist at HDFC Bank.
Some other central banks have similarly paused or indicated they are ready to pause, such as the Reserve Bank of Australia, which held rates steady on Tuesday in order to assess the impact of past hikes but flagged further increases may be necessary.
"We have to be extremely prudent in our actions," Das said in his statement.
While the central bank has taken the decision to pause rate hikes in light of global macroeconomic and financial conditions, "our job is not yet finished and the war against inflation has to continue", Das said, reiterating the resolve to bring inflation back within the central bank's target band of 2%-6%.
Retail inflation rose 6.44% year-on-year in February, easing from 6.52% in January but has remained above the central bank's mandated target range for 10 out of the last 12 readings.
The central bank sees inflation at 5.2% in 2023-24, and GDP growth is seen at 6.5% in the financial year beginning April 1.
Financial stability concerns appear to have prompted the pause in rate hikes, said Aditi Nayar, chief economist at rating agency ICRA. However, if inflation does not fall in line with the MPC's assessment, "another hike could be in the offing, especially if the financial stability situation stabilises", Nayar said.
The decision to hold interest rates steady was unanimous in contrast to the last decision when four members had voted for a hike in rates.
Government bond yields crashed after the surprise RBI decision. The 10-year benchmark 7.26% 2032 bond yield dropped to 7.1469%, the lowest level since Sept. 15 immediately after the policy announcement, against 7.2857% before the decision. The yield was at 7.1843% as of 10:20 a.m. IST (0450 GMT).
