RBI Monetary Policy Meeting: The Reserve Bank of India monetary policy committee (MPC) is set to announce its latest bi-monthly monetary and credit policy on Wednesday, 8 February, concluding a 3-day meeting. Since retail inflation has dropped to remain below RBI’s threshold of 6% for three months in a row, the MPC is expected to increase interest rate by just another 25 bps to take the repo rate to 6.25%. Economists and analysts believe that since inflation is trending down, and global commodity prices have softened, this could be the last rate hike in the ongoing rate hike cycle. After announcing a hike in Feb, RBI is expected to pause, and wait for inflation to fall further before considering a shift toward a stimulative stance as Asia’s third-largest economy slows.
RBI to pause rate hike after 25 bps increase in Feb
“The RBI MPC will view the recent inflation prints favourably. We estimate inflation to average around 5.2% over the next 12-15 months. On the other hand, domestic growth remains on a decent footing for now while expectations of a global slowdown remain uncertain. The real repo rate would be positive by around 100 bps at the current level. Global rate hike cycles are close to peaking, though the central banks remain cautious,” said Suvodeep Rakshit Senior Economist, Kotak Institutional Equities.
While the MPC’s decision is finely balanced between a pause and a 25 bps hike, Rakshit expects the MPC to hike by a last 25 bps to push the real rate comfortably into positive. “This would help the RBI to be on a prolonged pause as it assesses the lagged impact of the past rate hikes and input price movements, evolution of the global and domestic demand conditions, and behaviour of global central banks,” he said.
Guidance to be key variable in RBI MPC policy review
Nuvama Institutional Equities also expects a 25 bps rate hike at the upcoming MPC. The brokerage noted that Balance of Payments (BoP) risks still linger as the Fed is tightening and India’s CAD is large. While headline CPI has eased, core inflation remains sticky. “However, with this rate hike, the policymakers may guide for a pause as they evaluate the full effect of past tightening. Besides, the global slowdown is already hitting India’s exports (contracting now), and there are early signs that domestic consumption too is cooling off,” it said.
Nuvama analysts believe that in this policy review, guidance – more than action – will be the key variable, with regards to both the future path of interest rate and domestic liquidity. “In any case, over the course of 2023, we expect CAD and inflation concerns to subside, but growth concerns to rise,” it said.
RBI policy stance: Withdrawal of accommodation or Neutral?
According to Rahul Bajoria, MD & Head of EM Asia (ex-China) Economics, Barclays, since headline inflation is back in the target range, it is increasing the room for dissenting views among MPC members, and “at least two are likely to vote to keep rates on hold at the meeting this week”. Bajoria added, “We also think it is likely that the policy stance will be changed to neutral, signalling a long period of rates on hold.”
However, analysts at SBI believe that the stance could continue to be a withdrawal of accommodation, even as liquidity is close to neutral. “Even though RBI could pause as it allows past rate actions to work with long and variable lags, the RBI could still guide the markets with a rate action in future that will be purely data dependent,” they said.