RBI policy: Reserve Bank of India's hawkish pause keeps households on edge

India's central bank left its key repo rate unchanged at 6.5 per cent on Friday but warned elevated food inflation is still a concern.

After six consecutive rate hikes between April 2022 and February this year, the Reserve Bank of India has kept monetary policy on hold.

The likelihood the central bank hints at rate cuts was factored in before today's decision and comments from Governor Shaktikanta Das.

“Monetary policy will remain actively disinflationary,” said the governor.

But the RBI more or less dashed those expectations by sounding hawkish in its assessment of inflation.

Households hoping for some relief from already stretched budgets will, for now, have to deal with high borrowing costs.

While inflation has eased for a few months, the central bank voiced concerns about food prices.

Retail inflation will remain above 5 per cent this fiscal year and next.

So, for consumers dealing with higher monthly payments towards their loans, any hope for them to come down anytime soon is just that - hope.

Despite a gloomy outlook for the global economy from the ongoing geopolitical unrest in West Asia and on the edge of Europe, the central bank sounded positive about the domestic economy.

Governor Das said India remains the fastest-growing major economy globally and has surprised everyone with its upside.

"The Indian economy presents a picture of resilience and momentum," according to Das.

"Growth remains resilient and robust, surprising everyone," he said.

After faster-than-anticipated growth in the July–September quarter, the central bank projects the economy to grow by 7 per cent in the current fiscal year, up from 6.5% in the previous year.

That helps the narrative for India's monetary policy on hold for longer as the country's bane for decades - supply-driven high inflation - still weighs on central bank decisions.

The deputy chief economist for emerging markets at Capital Economics, Shilan Shah, said, "The economy is performing exceptionally well, which limits any immediate need for looser policy."

RBI Governor said the inflation outlook, however, remains uncertain. He added that the near-term outlook is "masked by risks to food inflation."

On policy easing, Das said "loosening" was off the table, at the moment.

The RBI wants to be ahead of the curve after dismissing rising price pressures as "transitory" in 2021, similar to reactions from major global central banks back then.

The world underestimated surging inflation and had to react more aggressively when price pressures soared to multi-decade highs globally.

But bets in recent months have increased for global interest rates to ease next year.

The RBI's tone suggested otherwise and pushed back on expectations for a rate cut cycle to later than earlier.

Clearly, the RBI's plans and commentary suggest there will be no respite from higher borrowing costs, especially for those with home loans.

The central bank's aggressive rate hikes pushed up equated monthly instalments for borrowers already dealing with higher prices of almost everything.

For some, the loan duration was increased by about five years.

Even if the RBI does start to cut rates at some point, the translation to lending costs will take longer.

Indeed, usually, banks pass on any change in rates on the up almost immediately to consumers but take longer to transmit any easing in interest rates.