RBI MPC likely to hit pause after one more rate hike in Feb’23; inflation to moderate, growth outlook cautious | The Financial Express

RBI MPC likely to hit pause after one more rate hike in Feb’23; inflation to moderate, growth outlook cautious

The terminal repo rate is seen at 6.5% and retail inflation is expected to moderate going forward. However, adverse geopolitical developments and an unexpected shift in Fed’s stance pose risks to the growth outlook.

RBI MPC likely to hit pause after one more rate hike in Feb’23; inflation to moderate, growth outlook cautious
The Reserve Bank of India MPC is widely expected to deliver one more repo rate hike in February 2023, before pausing the hike cycle

The Reserve Bank of India Monetary Policy Committee is widely expected to deliver one more repo rate hike in February 2023, before pausing the hike cycle, even as the full impact of past rate hikes and liquidity tightening measures is yet to be seen amid moderation in inflation, analysts said. Earlier on Wednesday, RBI MPC raised the repo rate by 35 bps, in-line with expectations.

While commodity prices have cooled off, and fall in crude prices is also encouraging, sticky core inflation and higher cereal prices, and increasing food inflation has kept the central bank cautious. The terminal repo rate is seen at 6.5% and retail inflation is expected to moderate going forward. However, adverse geopolitical developments and an unexpected shift in Fed’s stance pose risks to the growth outlook.

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Commodity prices, Union Budget outcome to determine FY23 terminal rate

“Headwinds to the domestic economy would emanate from slowdown/recession spilling over and lagged impact of monetary policy tightening. RBI lowered the real GDP projection marginally from 7% to 6.8% for FY23, while the CPI inflation forecast remained unchanged at 6.7% for FY23. Overall, the MPC statement was less dovish than expected given that there was no change in stance,” said Dhiraj Relli, MD & CEO, of HDFC Securities. 

However, some MPC members have expressed their view to await transmission to avoid overdoing hikes. “Reaction to the absence of change in stance is seen in bond yields, 10-year Gsec yields moved up 7bps to 7.30%. We expect that terminal policy rate would be 6.5% with the last 25 bps rate hike likely delivered in the February policy depending on the direction of commodity prices and outcome of Union Budget,” Relli added.

One more rate hike likely; Fed stance, geopolitics to be watched

According to analysts at Nuvama Wealth Management, sticky core inflation, strong credit growth, and services activity warrants an additional 25bps rate hike in the upcoming meeting, taking the repo rate to 6.5%. “Thereafter, we think RBI will likely pause because by then, real rates would have turned positive, global downturn could be spilling over to domestic economy, and the global central banks, including Fed, may also be contemplating a pause,” they said. By RBI’s own estimates, economic growth will move to 4% handle in 2H of FY23. “In fact, we think India’s growth could actually surprise on the downside,” the analysts said, adding that adverse geopolitical developments and unexpected shift in Fed’s stance pose risk to the outlook.

According to analysts at Motilal Oswal Financial Services, the 35 bps rate hike in the December MPC meeting was on expected lines. However, two points that stood out are the RBI’s confidence in India’s resilience in GDP growth since monetary tightening began; and the fight against inflation, the worst of which is behind us. “Therefore, we believe that there is room for the RBI to hike rates by at least another 25 bps in CY23,” the domestic brokerage said. However, this is contingent on the US Federal Reserve’s monetary policy decisions next week and in Jan’23; India’s inflation prints in the last two months of this calendar year.

Inflation likely to fall below 6% only in FY24

In the current cycle, analysts at Bank of Baroda also see another 25 bps rate hike which they expect to materialize in Feb’23. “RBI was clear in its statement that it is quite cognizant of headline CPI print and intends to take policy course to bring down inflation gradually to the targeted level. Though some of the BRICS nations have already shown some relief on CPI numbers, domestic inflation is still likely to be elevated for FY23,” they said. A below 6% print may be feasible only in FY24, that too because of an inflated base and impact of lagged transmission on growth, they said.

Also Read: RBI Monetary Policy Committee continues to be guarded – delivers “not done yet” message

Rate cut by September 2023

Analysts at ICICI Securities believe that the 35 bps rate hike announced on Thursday is the last of the rate hikes in the current cycle. “The next monetary policy action is likely to be a rate cut in Sep’23,” they said. The brokerage remains confident that India’s CPI inflation will moderate toward 5% on-year by Mar’23, preventing the need for any further rate hikes in this financial year or in the first half of FY4. “A rate cut by Sep’23 is the likely next monetary policy action by the RBI, in our view,” they said.

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First published on: 08-12-2022 at 11:13:51 am
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