RBI has paused its interest rate hike cycle. In the closing market commentary yesterday, IIFL Capital Services had said that the probability of RBI pausing the interest rate hike cycle today could not be ruled out. In today’s monetary policy announcement, RBI has kept repo rate unchanged at 6.5%.
The decision to pause interest rate hikes seems to be a sound one given the economic challenges the country is facing. Job cuts are being seen across sectors. Today, the country’s biggest two wheeler manufacturer, Hero Motors announced a voluntary retirement scheme for its employees, as a way to bring down its workforce. Any further increases in interest rates will have more adverse impact on both interest sensitive consumption and investment. This in turn will result in further increase in unemployment rate. According to Centre for Monitoring of Indian Economy, unemployment rate in India stood at 7.5% in February. A high unemployment rate is not a favorable thing for the government in the year leading to general elections.
Consumer price retail inflation of India in February stood at 6.44%. This was marginally lower than 6.52% in January. The interest rate hikes implemented by RBI till now seem to have a very marginal impact on controlling inflation, if any. RBI Governor Shakti Kanta Das said today that interest rate hikes implemented till now are still to have their full impact. Monetary policy transmission of these hikes is still taking place. The Governor said that the central bank is ready to act in case retail inflation remains elevated.
The impact of successive interest rate hikes by US Federal Reserve is being seen even in the case of US economy. The US economy was in a much stronger position than the economies of countries like India during and after the Covid period. But new job openings in US in February were much below expectations. JP Morgan CEO Jamie Dimon has said that the banking crisis is far from over. He added that its effects will be felt for years to come. In this uncertain scenario, RBI seems to have taken a less risky approach of keeping interest rates unchanged.
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