On Wednesday, the Indian central bank hiked its interest rate by a quarter percentage point as had been expected.
However, the Reserve Bank of India (RBI) took the markets by surprise when it left the door open for more tightening down the road, saying that core inflation continued to be high.
The policy stance
According to the central bank, it wants to withdraw from its accommodative monetary policy stance, as four of the six members of the committee were in favor of that decision.
Most analysts had predicted that the 25 basis points hike on Wednesday would be the last hike from the RBI in its current tightening cycle.
The tightening cycle had begun last year in May, which has seen it hike the interest rate by 250 basis points since then.
In recent weeks, a number of central banks around the world have hinted at halting, or pausing their tightening cycle, as consumer inflation is cooling down and there are signs of softening in economic growth.
After the Indian central bank’s decision, there were some modest gains recorded in Indian stocks, while there was a rise in bond yields and the rupee remained unchanged for the most part.
There are a total of six members in the Monetary Policy Committee (MPC), three of whom belong to the central bank and the remaining three are external members.
They raised the lending rate to 6.50%, which was another split decision. Out of the six members, four of them had been in favor of it.
Shaktinkanta Das, the Governor of the RBI, said that the biggest concern is the stickiness of underlying inflation and they want to see moderation.
He added that they needed to be unwavering in their goal to bring down inflation. Das said that the impact of earlier rate increases was gradually coming to light in the economy.
However, he also added that more calibrated monetary policy action could be required. He said that real interest rates, adjusted for inflation, were still below the levels before the pandemic and there is surplus liquidity.
But, the liquidity surplus remains lower than what it was during the COVID-19 pandemic. It had stood at 9 to 10 trillion rupees at the time.
The RBI has managed to bring down this surplus to below 2 trillion rupees since then. In December, the annual retail inflation in India declined to 5.72% from 5.88% a month earlier.
This brought it below the upper tolerance band of the RBI of 2% to 6% for the second month in a row. But, core inflation still stood at 6.1%, which excludes volatile fuel and food prices.
Forecasts put consumer inflation for this year to be 6.5% and in 2024, it is expected to be 5.3%. Market analysts also amended their forecasts for the interest rate after the meeting.
They said that while inflation has become less of a threat, they cannot rule out further interest rate hikes completely.