The MPC’s decision to stand pat is a clear signal that inflation remains the anchor of monetary policy. Interest rates will not be used to manage the currency, but the MPC will respond to the inflationary consequences of depreciation.
Currently, although higher oil prices and a weaker currency add to near-term cost pressures, the RBI acknowledged the expected inflation undershoot on lower food inflation and tighter financial conditions. The pause also gives it a chance to wait and observe the impact of the hikes already delivered. Lastly, the change in its stance indicates the MPC remains ready to hike, if inflation pressures become more adverse.
Overall, given our view of an impending growth slowdown due to a significant tightening of financial conditions, 50bp in cumulative hikes already in place and the need for RBI to allow lagged effects of policy transmission to become apparent, we expect rates to remain unchanged over our forecast horizon.
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