The Reserve Bank of India's Monetary Policy Committee may feel vindicated with its overall strategy of embracing a hawkish pause in April as inflation has returned to its target band.

In March, annual CPI inflation slowed to 5.66%, a 15-month low, primarily due to a high base. CPI inflation from January through March averaged 6.2%, 50 basis points more than the RBI's forecast, at 5.7%. CPI inflation averaged 6.7% for 2022–2023, 20 basis points higher than the central bank's projection.

The overall index in March was up 0.2% month-on-month, the same as February and slower than January's 0.5%.

There is some comfort that the momentum has eased as well.

In March, the index for cereals fell 0.4% month over month. This fall is likely because the government sold 2.9 million tonnes of food grain through an online auction as part of the Open Market Sale Scheme until March 10.

Importantly, core CPI inflation was at 5.8% in March. This must relieve RBI that core inflation has fallen below 6% for the first time in seven months.

Inflation taking a favorable turn does not mean the MPC will revert to rate cuts as averred by Governor Shaktikanata Das.

He had stated after the MPC meeting that the committee's decision was a pause, not a pivot, and that the decision to pause applied only to the April round of the MPC meeting.

As argued in the previous week's column, further rate hikes cannot be ruled out, but the bar for rate hikes has risen sharply.

Even more so after the latest inflation reading. Some economists and commentators have said that notwithstanding what was stated by Governor Das, it was indeed a pivot and not a mere pause.

But MPC is unlikely to pivot to rate cuts in the remainder of the year. In fact, it is unlikely to change its stance of continued "withdrawal of accommodation" either at its next meeting.

Inflation fine print and weather vagaries will keep the RBI members of the MPC hawkish in words and stance, if not in action through rate hikes.

The RBI officials will not let up on the suspense of rate hikes, for the central bank may still have to respond to more rate hikes by the US Federal Reserve and domestic food inflation.

In particular, the RBI may avoid injecting liquidity until inflation decisively comes below 5%.

MONSOON MASALA

The southwest monsoon is expected to be normal this year, at 96% of the long-period average, according to the India Meteorological Department's estimate. Rainfall between 96% and 104% of the long-period average is considered normal by the IMD.

Despite the forecast for El Nino to start in July, the IMD predicts a typical monsoon. India often has less rainfall when there is an El Nino, an abnormal warming of ocean surface temperatures in the eastern equatorial Pacific.

The southwest monsoon has been deficient in seven and below normal in one of the last ten El Nino years. IMD's long-range monsoon rainfall forecast exceeded the model error range in six out of the last ten years.

Separately, the IMD has also forecast higher-than-normal temperatures for the April to June period. El Nino's effects on the monsoon's development and the influence of heat waves could hurt the disinflation process.

FED HIKES

The MPC will also have to contend with the Fed's monetary policy and how that impacts capital inflows into India. US CPI inflation for March, released hours after India released its price index, was up 5% from a year ago.

Core inflation was up 5.6% from a year ago. It's the first time in over two years that the core came in above the overall measure.

The consensus is that the Fed will hike interest rates at least one more time in May and opt for a prolonged pause after that.

It may be base effects that brought down US inflation as well. Inflation in March a year ago had risen when energy prices jumped on Russia's invasion of Ukraine. It is expected that the banking sector crisis in the US, which has hurt the flow of credit, could force the Fed to slow down on rate increases or even start slashing interest rates.

But once the banking crisis eases up, the flow of credit too could ease up, alleviating the pressure on the Fed to respond to liquidity tightness.

It is most likely that Fed could adopt RBI's strategy after May: A "hawkish pause."

Last month's inflation readings in the US and in India offer some respite. But it may be premature to start discounting rate cuts in the remainder of 2023.