RBI does it differently than the West amid banks turmoil. Here’s why repo rate pause is for banking sector

On Thursday, RBI in a surprise move kept the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 6.50%. Subsequently, it also kept the standing deposit facility (SDF) rate unchanged at 6.25%, while the marginal standing facility (MSF) rate and the Bank Rate were also unchanged at 6.75%.

However, the “withdrawal of accommodation” is most likely an indication that the fight to tame inflation is not over yet and also there is still room for rate hikes.

Since May last year, RBI has hiked the repo rate by 250 bps – taking it from 4% to 6.5%. This was in line with other central banks, however, banking systems in the West have emerged as the first ones to show the impact of rising interest rates.

Banks in the West are struggling with a liquidity crunch which also resulted in the failure of two major US banks and also resorting to acquisitions and mergers. There have been concerns about the rate hike cycle being the cause of turmoil in the banks here. However, West side’s central banks have still raised their key rates while monitoring the impact of it on the economies.

There were concerns raised about whether RBI can continue to hike rates like other central banks. Most likely the expectations were of a 25 bps hike in the repo rate during April’s policy. However, RBI has done the unexpected, and has chosen an early “pause” instead of a “rate hike”. This would be the first move in about 11 months. 

According to Vivek Goel, Joint Managing Director, Tailwind Financial Services, with global policymakers of major banks grappling with balancing their fight against inflation while maintaining growth, India has been a bright spot in the past year and this meet might help further strengthen the positioning. 

He added, “While global central banks continued to hike rates amidst concerns on banking system stability, RBI has managed to hit the pause button already while reassuring markets about the strength of Indian banking sector and their asset quality. And even though, future guidance is limited by the governor while cautioning against global as well as domestic risks leading to continued focus on withdrawal of accommodation as their stance, there are many positives to take away from this meet.”

Further, Soumitra Majumdar, Partner, JSA said, the unchanged rates should instil some level of confidence and certainty in pushing credit growth and deployment. Coupled with sustained growth, the RBI has also emphasised strong prudential checks on financial institutions, to ensure financial stability and to insulate India from the financial sector crisis in some of the other major economies.

Majumdar added, “While the growth forecast has been tempered down, however, the RBI’s measured stance should improve India as an investment destination.”

As per RBI’s data, the average daily absorption under the LAF moderated to ₹1.4 lakh crore during February-March from an average of ₹1.6 lakh crore in December-January. During 2022-23, money supply expanded by 9% and non-food bank credit rose by 15.4%. India’s foreign exchange reserves were placed at $578.4 billion as on March 31, 2023.

Also, ASSOCHAM Secretary General Deepak Sood said, “In a way, the decision not to go in for any more rate increase would have surprised many as a larger expectation was on 25 basis points rise in the policy rates even as ASSOCHAM remained confident about the RBI striking a balance between reining in inflation and growth.”

Sood said, the policy statement has made a correct reading of the global economy and its possible impact on India which has done well in terms of growth, billed as the fastest amongst the major economies without losing sight of the inflationary risks.

Assocham’s secretary believes that RBI’s pause in rate is understandable amidst current volatility in global market.

According to Sood, while the fineprint of the RBI policy statement is tilted in favour of further leash on inflation, it is understandable in the face of continuing volatility in the global markets. ”Even though Indian banks stand in good stead without the kind of risks faced by banks in the US or Europe, RBI has cautioned them about any unforeseen spillovers. The peremptory measures speak about the agility of the Indian banking regulator. Besides, our foreign exchange reserves are back to USD 600 billion-plus, giving us more cushion to deal with any headwind which may flow eastward.

Not just banks, many other sectors will benefit from RBI’s pause in repo rate. Anand Varadarajan, Director, Acit C Mehta Investment Intermediates said, “This move is expected to be positive for the economy and markets in general and particularly for rate sensitive sectors like Banking & Finance, Auto, Consumer Durables, Real Estate, Infra, etc.”

Also, Rohan Juneja, Managing Director & Chief Executive Officer, TruCap Finance said, “A robust rabi crop may likely ease the pressure on inflation but the potential risk of food inflation has been highlighted by the Central bank given uncertainty on the current year’s monsoon along with significant likelihood of core inflation levels above 6% in the near term due to resilient domestic demand.”

Additionally, Angad Bedi, Managing Director, BCD Group said, the move not only comes as a breather for borrowers but also for the developer community that has been reeling under the combined pressure of an increase in prices of building materials amid a drastic jump in lending rates. The RBI is an indication the banking regulator is willing to walk the extra mile to support growth.

Juneja further added, “The pause in the rate cycle, however, will be positive in the near term for most sectors. Going forward, progress on the monsoon season and banking sector events in the US and Europe will be key in determining the trajectory of interest rates.”