Reserve Bank of India has ‘enough valid reasons’ to pause rate hikes in April – ISEC PD

India’s rate-setting committee has “enough valid reasons” to pause hikes when it meets next in April, as risks to economic growth become more acute in the aftermath of the global banking crisis, ICICI Securities Primary Dealership said on Friday.

Market participants and analysts broadly expect a rate hike of 25 basis points (bps) on April 6, when the country’s monetary policy committee (MPC) ends its three-day meet.

The MPC has so far increased the policy repo rate by 250 bps since May in its fight against stubborn inflation, which came in at 6.44% in February, and has been above the higher end of the central bank’s target range of 2%-6% for a large part of the fiscal year.

“While we are sympathetic to the view that a rate hike could be needed to nudge real policy rates firmly into neutral territory, we think risk-management considerations call for a pause in rate hikes,” A. Prasanna, head of research at the primary dealership wrote.

Earlier this week, the U.S. Federal Reserve raised rates by 25 basis points (bps), with policymakers saying they believed bringing down inflation may require only one more rate hike this year.

The hike was smaller than the 50 bps rise markets had expected from the Fed before the banking turmoil in the U.S. and Europe. The Fed has now raised interest rates by a total 475 bps since March last year.

“Should the developments in U.S. worsen simultaneously with a rate hike by the MPC then the RBI and MPC will not be able to reverse course quickly and financial conditions could tighten far more than intended,” Prasanna said.There is “no need” for a significant upward revision to the RBI’s inflation estimate of 5.3% for 2023/24 announced in the February policy, he added.

The RBI would always have the option of raising rates in its June policy should the banking turmoil in U.S. prove short-lived and domestic inflation continues to rise, Prasanna said.

The MPC is likely to retain its stance of ‘withdrawal of accommodation’ in April even as it pauses rate action, he added.

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