scorecardresearch

RBI MPC priority: Taming inflation over growth; 35 bps rate hike likely, 50bps not ruled out

In the RBI Monetary Policy Committee minutes released last week, the MPC members were tussling between inflation concerns and growth worries, while deciding the central bank’s course of action to maintain financial stability amid global policy shocks. Broadly, the outlook of the MPC remains hawkish.

RBI MPC priority: Taming inflation over growth; 35 bps rate hike likely, 50bps not ruled out
The CPI inflation for the month of September came in at 7.41 per cent, rising from 7 per cent in August, warranting an explanation from the MPC to the government. Image: PTI

Following the 50 basis points rate hike in September 2022, the RBI Monetary Policy Committee is expected to further hike the interest rate by 35-50bps in the upcoming MPC meeting in a bid to maintain financial stability amid global policy shocks, according to analysts. The Reserve Bank of India is expected to be highly data-driven in its decisions regarding further rate hikes, focusing more on taming inflation rather than domestic growth concerns. In the RBI Monetary Policy Committee minutes released last week, the MPC members were tussling between inflation concerns and growth worries, while deciding the central bank’s course of action to maintain financial stability amid global policy shocks. Broadly, the outlook of the MPC remains hawkish.

Pause in rate hikes crucial since monetary policy acts with a lag

The CPI inflation for the month of September came in at 7.41 per cent, rising from 7 per cent in August, warranting an explanation from the MPC to the government. The retail inflation print hints future buoyancy on the back of supply disruptions, unseasonal rains, and volatility in global markets. An attempt to weigh down rising inflation with policy rate hikes is being driven by the efforts to align with the United States’ policy rates, as noted by MPC member Ashima Goyal. “Excessive rate rises will not make inflation targeting credible if they are unable to lower supply-side inflation and instead raise costs as demand and investment falls,” Goyal said, taking a more dovish stance.

Another member who chimed in with a dovish outlook was Jayanth R Varma who argued that a pause in rate hikes is crucial since the monetary policy acts with a lag. “It may take 3-4 quarters for the policy rate to be transmitted to the real economy, and the peak effect may take as long as 5-6 quarters. If we raise the repo rate to around 6 percent at this meeting, that would be a cumulative increase of around two percentage points in the space of just four months,” Varma said. The rest of the members, including RBI governor Shaktikanta Das, continued to remain hawkish.

35 bps hike likely in Dec MPC; 50bps increase not off the table

Based on the split in decisions in the latest MPC meeting, analysts at Yes Bank believe that the MPC will unanimously go for a 50bps hike in the upcoming December meeting. “Rather than a 5:1 favouring a 50bps hike in this (September) MPC meeting, the next meeting might see a 4:2 split, implying that the 50bps hike would go through,” Yes Bank analysts said. Rahul Bajoria, chief India economist at Barclays, said. “The MPC minutes show a growing difference of opinion within the MPC, with policy makers divided on future action and the rate trajectory. Still, higher September CPI and an above-target tracking estimate for October keep more hikes in play.” According to Bajoria, MPC is likely to hike the repo rate by 35bps point in the next meeting.

Global disruption be key for RBI’s reaction function, Inflation to stay above 6 per cent in Oct

Madhavi Arora, lead economist at Emkay Global Financial Services, also echoed an up to 50bps repo rate hike in December. “RBI would practice caution on turning too restrictive. The terminal rate could hover near the estimated neutral real rates, implying future hikes totaling a maximum of ~50bps. But the extent of global disruption will remain key to RBI’s reaction function ahead,” Arora said. She added that the October inflation is likely to remain above 6.3 per cent, with moderation expected to reflect in the second half of this fiscal.

Get live Share Market updates and latest India News and business news on Financial Express. Download Financial Express App for latest business news.

First published on: 17-10-2022 at 13:45 IST