By Ira Dugal
MUMBAI (Reuters) – The Reserve Bank of India’s decision to keep interest rates unchanged, after a nearly year-long hiking cycle, may extend even though the central bank described its move as a pause and not a pivot, said one of the few analysts who predicted the surprise decision.
A Prasanna, head of research at ICICI Securities Primary Dealership, was in the minority of analysts that had expected the RBI to pause rate hikes at its meeting on Thursday.
“By the next meeting (in June), if inflation data is in line or slightly better and globally, if we get an indication that the U.S. Federal Reserve is done with hikes, then, I think, their (RBI’s) conviction will also grow,” said Prasanna.
“So, then that pause can get extended in the next meeting.”
The central bank’s surprise decision to hold its key repo rate steady, at 6.50%, after six consecutive hikes sent the benchmark 10-year bond yield tumbling to a near seven-month low of 7.15%.
However, yields recovered from their session lows as RBI officials repeated several times that they could resume rate hikes at its meeting in June.
“This is the only way they could have paused, by combining it with the option to hike in the future,” said Prasanna.
“If they had combined it with more dovish commentary, then the market would have gone ahead and started pricing in cuts also.”
The decision on future rate hikes will depend on whether inflation runs above the RBI’s projections of an average of 5.2% in 2023-24, compared to 6.44% in February.
That makes March and April data key, said Prasanna, who expects that inflation can even go below 5% by April. Inflation has stayed above the RBI’s upper tolerance limit of 6% for most of the last financial year, including in January and February.
Expectations from the U.S. Federal Reserve, which will be clearer by the time the RBI meets in June, will be an important input as well, said Prasanna.
Despite growing expectations of a prolonged pause, ISEC-PD expects bond yields to remain rangebound after Thursday’s fall.
While this pause is positive, the supply of government bonds also remains high, said Prasanna. The impact of recent tax changes on inflows into debt mutual funds also needs to be assessed, he said.
(Reporting by Ira Dugal; Editing by Savio D’Souza)
