As February CPI softens, some economists see RBI pausing rate hike cycle

As retail inflation, measured by the consumer price index (CPI), softened to 6.44% in February from 6.52% in January, some economists believe the Reserve Bank to India (RBI) will likely pause its rate hike cycle which started in May 2022.

“February CPI inflation moderated to 6.4% y-o-y in February vs 6.5% in January, in line with both our and consensus expectations, with core inflation easing to 6.1% from 6.2%. Underlying inflation is showing signs of moderation, even as the y-o-y rate is above 6%,” economists Sonal Varma and Aurodeep Nandi said in a Nomura research report on Tuesday.

The economists expect headline inflation to fall to 5.5% in March, with core inflation easing to 5.7%. Beyond March, Nomura expects a material fall to below 5% in headline as well as core inflation, with both likely to average at 4.9% in FY24. A favourable base effect will play some role, but economists expect continued moderation in the underlying momentum, due to weaker growth.

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Benign forward inflation profile, lagged monetary policy effects, worsening US financial and economic outlooks and weaker domestic demand outlook in FY24 are among the key factors for a pause in rate hikes by the RBI, Nomura said. “We assign a higher probability to a pause (80%) than to a 25bp hike (20%). As both growth and inflation surprise lower, we also believe a rate cutting cycle is on the cards this year. We maintain our view of 75bp of cumulative rate cuts starting from October 2023,” the report said.

Soumya Kanti Ghosh, SBI Group chief economist, says the 250 bps rate hike has been correctly frontloaded by RBI but “time may have now come” for it to pause and rethink the impact of past repo rate hikes. He said that the persistent rate hikes have led to a dent in credit demand from the financially weaker section of the society.

The proportion of home loans up to Rs 30 lakh in total loans disbursed has declined to 45% during January and February, from around 60% of the total disbursals in the quarter ended June 2022, he said. Whereas, loans above `50 lakh rose from 15% to 25% of the fresh housing loans this fiscal.

“Our analysis indicates that of around 5.5 million home loan accounts linked to EBLR (external benchmark-based lending rates), approximately 4.7 million customers with loans amounting to approx `8 trillion witnessed increase in tenure, EMI or both in their existing home loans,” he said. Further, Ghosh said the expectations of US Federal Reserve maintaining an ultra-hawkish stance have come down after the failure of Silicon Valley Bank.

Siddhartha Sanyal, chief economist and head of research at Bandhan Bank, said excess liquidity in the banking system has dried up in recent months and lending rates have moved up sharply, partly reflecting the current EBLR regime and strengthening the case for the rate hike cycle coming to an end.

Also read: Food inflation eases a tad in Feb

“The most recent concerns about pockets of uncertainty in the US banking system will likely have a bearing on the Fed’s course of action, and, thereby, on monetary policy across countries. Thus, while the MPC decision will depend on incoming data over the next few weeks, the bar for further hike in the repo rate has moved higher despite the two consecutive CPI prints above the RBI’s tolerance band,” Sanyal said.