The Reserve Bank of India (RBI) is likely to continue with its razor-sharp focus on inflation and not pause the repo rate hike cycle in the April monetary policy committee meeting, a poll of economists conducted by FE showed.
The poll showed that 67% of the participants believe that the RBI will go in for a 25 basis point hike to 6.75%, as the January consumer price inflation jumped to a three-month-high of 6.52% in January.
As per Ritesh Bhusari, treasury head at South Indian Bank, the RBI should have “ideally” paused rate hikes at 6.50%. However, the recent inflation data and expectation that US Federal Reserve will also hike its key policy rates, has played spoilsport. Bhusari says the RBI will go ahead with a 25-bp rate hike in April and then pause.
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“With 7% repo rate, generally we have seen that in normal and tighter liquidity conditions, the spreads hover around 100 bps-150 bps over the repo for 10-year bonds. If 7% is repo then 8% to 8.5% may be the 10-year G-Sec yield, which will impact everyone. Right now we are at 7.5%, if it goes past 8% then there may be a panic situation,” he said.
Similarly, Suresh Khatanhar from IDBI Bank says the RBI would like to see the upcoming CPI number, the outcome of US Fed meeting and its effect on the currency and global yields. “The macroeconomic situations prevailing at the last MPC meeting still persist. On the domestic front, the core inflation is likely to be above 6% in near future before cooling off. Global inflation still remains at elevated levels,” he said.
Ritika Chhabra, quant macro strategist at brokerage house Prabhudas Lilladher, says the jump in January inflation reading was a shocker for everyone. The retail inflation inched up by 6.52% against consensus estimate of 5.9%. The recent US CPI print also surprised on the upside, she said.
“This is leading to renewed concerns that the inflation fight is not over yet. In a scenario where central bankers have to choose between taming inflation and supporting growth, there are no doubts about choosing the former,” Chhabra said.
Eyes on February CPI data
Some economists say the RBI will look at the February CPI data before firming up its plans.
Madan Sabnavis, chief economist at Bank of Baroda, says the developments that have taken place post last policy are that inflation has come at higher-than-expected number and the US Fed and European Central Bank have reiterated a hawkish stance. “We have also seen pressure on liquidity. This being the case the RBI will wait and watch for the Feb inflation number. If it is in the region of 6.5% again, then there will be a rate hike,” Sabnavis said.
However, one needs to recognise that in India rates have risen rapidly and the inflation rate is expected to soften well within the central bank tolerance band, he added.
The RBI has raised repo rate cumulatively by 250 basis points to 6.50% since the beginning of the rate hike cycle in May 2022. In its February MPC policy, two external members of the central board of RBI—Jayant Verma and Ashima
A case for rate pause
Soumyajit Niyogi, director at India Ratings & Research, says there is a case for the RBI to pause rate hike in its next policy on account of economic slowdown, visible in GDP figures. India’s Q3FY23 GDP grew at 4.4% on a year-on-year basis, lower than the previous two quarters.
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He added that even if there is a pause, the transmission of interest rates in the banking sector will continue, driven by tight liquidity and higher incremental cost of funding.
CRISIL Ratings chief economist D.K. Joshi also says 6.5% could be the peak repo rate, though there is a possibility of further rate hikes if inflation continues, particularly on the core side.
“Our call is the rate cycle will peak out with 6.5%…if they do not raise rates then they will probably shift the policy stance to neutral,” Joshi said.