Interest Rates: RBI’s Pause towards Pivot
Interest Rates: RBI’s Pause towards Pivot
- Dr. Kishore Nuthalapati*
The Monetary Policy Committee (MPC) meeting of Reserve Bank of India (RBI) commenced on 6th June and will conclude on 8th 2023. All are eager to note about the changes or continuity of the interest rates. However, it is almost a foregone conclusion that the Pause in the Policy Rates will continue.
Presently, the economic situation appears prospective with eased inflation, prices under control, adequate foreign exchange reserves, Indian Rupee exchange rate with US dollars within the range, and other high frequency indicators suggesting positivity. MPC reviews the surveys conducted by the RBI on consumer confidence, inflation expectations, corporate sector performance, credit, and liquidity conditions, and the projections made by industry professional forecasters. With a holistic view of all the variables, RBI adopts its stance in line with the projected economic situation in the future.
The stances are broadly three viz., accommodative, neutral and tightening. Accommodative stance, also called as dovish stance is where RBI actively supports economic growth by reducing interest rates, infusing more liquidity into the system, and persuading banks to actively disburse credit. Neutral stance is where RBI remains balanced when RBI considers that the policy setting, and the economic setup are in harmony. Tightening stance, also called as hawkish stance is when RBI targets inflation reduction, price stability, etc. There could be mid-ways of the above three stances.
The stances adopted by RBI are by and large just and futuristic. In June 2019, RBI changed its then prevailing neutral stance to accommodative. The change was necessitated to support the growth of the economy which was slow due to both domestic and global factors. Domestically, the agriculture and allied activities contracted, growth in the eight core industries was slow, the credit flow to MSMEs and rural sector was low, construction activity which provides huge employment was also low, etc. However, the then inflation was benign. The global factors include Brexit, US-China trade conflicts, high volatility in oil prices, recessionary threats in developed economies, etc.
Since June 2019 and until April 2022, RBI continued with its accommodative stance to support the growth. However, in April 2022, RBI stated that it remained accommodative but will focus on withdrawing its accommodative stance. This was a pivot in the stance. In June 2022, RBI averred to focus on withdrawal of accommodation to ensure that inflation remains within the target going forward. Since then, it has been withdrawal of accommodative stance.
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The stances adopted by RBI facilitated the resilience for the economy and the banking sector. At times, it appeared that the measures were hawkish, but the front-ending of the policy interest rates helped the economy to withstand the headwinds and saved the economy from recessionary threats, credit collapse, and other economic perils.
The present economic backdrop is relatively better. Consumer Price Index (CPI) inflation in April 2023 was at 4.70% and May 2023 CPI inflation is expected to be lower at about 4.6%. Wholesale Price Index (WPI) inflation in April 2023 deflated below unity and is expected to be around same in May 2023 as well. Unemployment rate did not rise and remained at 7.68%. The 10-years G-Sec yield reduced below 7%. The Indian rupee is trading at about 82.52 per US Dollar. The current account deficit (CAD) eased to 1.4%. The global oil prices are relatively lower. Importantly, the liquidity in the system is good at Rs. 1.75 trillion. Of course, certain concerns such as volatility in the oil prices, Russia-Ukraine issue, exchange rate volatility of global currencies with US Dollar, and monsoon related worries, etc, may remain.
Against this backdrop, while RBI will not be comfortable to reduce the policy rates until inflation is within 4% to 4.2%, it could clearly confirm its stance as Neutral indicting a harbinger to the reduction of interest rates in the latter part of the financial year as it may necessitate. The pronouncement on the stance by the MPC will be known on 8th June 2023.
* Disclaimer: Dr. Kishore Nuthalapati is the CFO of BEKEM Infra Projects Pvt Ltd. Views are personal and do not reflect those of any of the organizations he is or was associated with or of this publication.
(Former ICLS Officer, Ministry of Corporate Affairs, GOI) Advocate & Legal Consultant:Corporate Affairs. Author: Law Book Titled- "Penumbra of Force Majeure - A Treatise on COVID19" ( Edition: 2022)
1yYou have excellently illustrated the policy making of MPC of RBI in controlling interest rates by a methodology categorised into three types namely accomodative, neutral, and tightening. Yes, the economic trend,despite all odds, looks promising comparing with other countries. This trend demonstrates efficiency of the country’s leadership in navigating the ship against high tides in troubled waters. Good capitancy!
Chief Financial Officer
1yLearned members, Thank you for the privately sent queries. For the question why CPI inflation may not lower much in spite of the positive price trend, the answer is base effect. Same is the case for the WPI Inflation. Since WPI was negative at -0.92% approx, with such a base, the May month WPI inflation could be positive but the situation could be benign price trend. Therefore, while you feel that the interest rates should be reduced by RBI now itself, in all likelihood, the policy rates may continue at the levels they are. It will be great if the Stance is confirmed as Neutral. This itself is sufficient to indicate the future effective benign trend. Let us wait until 11 am. Thk You
Director, Siva Sivani Institute Of Management(SSIM)
1yVery clearly narrated and the strategies to manage MPC. Thank you sir
RETIRED AS DGM at Small Industries Development Bank of India
1yGOOD READ. THANKS FOR SHARING.