As the inflation beast continues to bite into economic growth, the Reserve Bank of India’s monetary policy committee unanimously decided to tame this ‘steeply’ rising inflation by raising interest rates 50 basis points. Now, with crude oil prices continuing to rise, prices of dairy and food items such as tomatoes pinching consumers pockets and the business activity still in recovery, economists see more front-loaded rate hikes from the central bank in the upcoming MPC meetings. Experts see 75-100 basis points rate hike by the end of current year, with the quantum of hikes in the upcoming August MPC meeting.
Experts say RBI’s decision to hike rates is in line with market expectations and it shows that it will continue to prioritise inflation. According to a Bloomberg poll of 41 economists, 17 of them had expected the RBI to hike the benchmark interest rate by 50 basis points. RBI has also raised inflation projections for FY 2023 by 100 basis points to 6.7 per cent. However, it is still below estimates of economists and private forecasters, who see inflation climbing up above 7 per cent this year. Inflation has remained above 6 per cent so far this year, ie, above RBI’s upper tolerance limit.
Here’s a sum-up of what experts expect from upcoming monetary policy meetings. The August MPC meeting is scheduled from August 2 to August 4.
‘Wonder if higher interest rates don’t hurt growth, how will it help bring down inflation’ : Nikhil Gupta, Chief Economist, Motilal Oswal
“Interestingly, while the RBI increases its FY23 inflation forecast to 6.7%, GDP growth projection is kept unchanged at 7.2%. We wonder that if higher interest rates don’t hurt growth, how will it help bring down inflation? It also suggests that most of the excess inflation is due to global/supply-side factors. Since the RBI continues to forecast strong growth, it is very likely that it delivers another 25bps hike on 4th of August before it takes a pause. Our fear is that growth could see a serious deceleration in H2FY23 and FY24 on the back of such steep tightening and structural constraints.”
‘Central bank attempts to knock inflation out of park but is still far from finishing line’: Aurodeep Nandi, India Economist, Nomura
“To knock high inflation out of the park, central banks are having to step out of the crease and come out swinging with tight monetary policy. Today’s hike by 50 basis points on the top of an inter-meeting 40-basis-point hike in May is reflective of inflation elbowing its way to the top of the RBI’s priority list and it belatedly looking to catch up with the curve. RBI’s upward revision of the inflation forecast for FY 2023 to 6.7% from 5.7% in April was also in line with our expectations, but still lower than our forecast of 7.2%. So we believe that we are still far from the finishing line and that more front loaded rate hikes are on the offing.”
‘RBI may raise repo rates to 5.25% by August’ : Suvodeep Rakshit, Senior Economist at Kotak Institutional Equities
“The RBI’s decision of hiking repo rate by 50 bps as well as increasing inflation estimate by 100 bps were in line with market expectations. The tone of the policy continues to be hawkish and we expect the RBI to continue hiking repo rate to ensure a neutral to marginally positive real policy rate. We expect 35 bps repo rate hike in the August policy to 5.25% and repo rate at 5.75% by end-FY2023. Along with pushing the repo rate to above the pre-pandemic level, a 35 bps hike would also signal a gradual normalization in the policy actions while being adequately hawkish. We also expect another 50 bps hike in CRR to 5% by end-FY2023 to move the liquidity conditions towards the pre-pandemic levels.”
‘MPC decision signals its intention to keep inflation at centre of decision making’ : Rahul Bajoria, MD & Chief India Economist, Barclays
“The RBI revised up its inflation forecasts, but kept its growth projections. This signals its intention to keep inflation at the centre of its decision making, and desire to return to the pre COVID policy stance as soon as it can. We now expect the policy rate to reach 5.75% by December, from 5.15% earlier. As today’s policy outcome was broadly along expected lines, we think this sends a very strong signal that the central bank no longer feels the need to go beyond market expectations in delivering rate hikes.”
‘We may see a 100 bps rate hike by December’ : Rajani Sinha, Chief Economist, CareEdge
“The RBI revised its FY23 inflation projection sharply higher by 100 bps to 6.7% signalling the heightened concerns over rising price pressures. Domestic prices have been upward bound and show no signs of respite with increasing concerns over inflation becoming broad-based. Thus, a challenge at hand for the RBI would be to not just restrict the second-round effects of rising inflation but also to prevent inflation from feeding on itself. However, as RBI prioritises inflation control it will have to walk a tightrope in order to sustain the nascent economic recovery that is underway. Going ahead, we expect the policy repo rate to be hiked by at least 100 bps in the current financial year, this will however be contingent on how the inflation-growth dynamics plays out.”
‘Inflation in next two quarters to remain above 7%’ Madhavi Arora, Lead Economist, Emkay Global Financial Services:
“The triple whammy of commodity-price shocks, supply-chain shocks and resilient growth, has shifted the reaction function in favour of inflation containment. The reaction function is now evolving with fluid macro realities. The inflation prints of next two quarters are likely to exceed 7%, which could pressure the RBI into acting sooner rather than later. FY 2023 could thus further see rates going up by 75 bps+, with the RBI now showing its intent to keep real rates neutral or above to quickly reach pre-Covid levels.”