RBI governor says will not surprise the market with sudden rate hike

India’s central bank, which has been maintaining an accommodative monetary stance despite inflation climbing above its comfort level earlier this year, is unlikely to make sudden shock moves to directionally change the policy rate.

Reserve Bank of India (RBI) governor Shaktikanta Das told a television news channel that the central bank does not want to surprise markets with a sudden rate hike, amid concerns surrounding inflation.

“We are constantly monitoring the situation and we will act at the appropriate time. At the current juncture, we feel that appropriate time has not come,” said Shaktikanta Das.

He added: “All our actions will be calibrated, they will be well-timed, they will be cautious. We don't want to give any sudden shock or any sudden surprises to the markets.”

This should come as a relief to the corporate sector, which is enjoying a low interest rate regime coupled with an ebullient stock market that has been trading at record highs and beating global peers this year.

The RBI had last cut interest rates in May 2020 when it had reduced the policy repo rate by 40 bps to 4% as the growth outlook was sombre. The economy contracted by 7.3% in 2020-21 as the spread of Covid-19 and lockdowns impacted business operations and sentiments.

GDP growth did see a pickup despite a brutal wave of the pandemic in North India as also other parts of the country in the April-May period. Analysts estimate the country’s GDP to grow around 20% in the first quarter ended June after shrinking by a fourth in the same period last year. While the base effect will likely give an artificial push to the growth rate, activity would remain below the pre-pandemic period at an absolute level.
Meanwhile, retail inflation—which is closely tracked by the RBI in framing its monetary policy—has moderated after shooting past the red zone. Retail inflation cooled down to 5.59% in July, coming within the RBI’s target range of 2-6%. It was above 6% in April and May.

According to the RBI governor, the current inflation looks transitory and the central bank expects it to cool down further in the coming months. Part of the rise in inflation was due to rebound in the global oil prices that affects Indian inflation adversely as much of the oil is imported in the country.

Das said while the RBI is watching the revival of economic activity there is still some uncertainty around the pandemic. He added that some parts of the economy, such as the manufacturing and service sectors that are not dependent on physical contact, are showing a rebound.