RBI Monetary Policy Committee is likely to continue with the pace of repo rate hikes, in its upcoming MPC meeting during 5-7 Dec. The Reserve Bank of India MPC is expected to announce a 35 basis points (bps) rate hike, according to economists. A 25 bps or 50 bps hike, can’t be ruled out either, they said. The central bank has hiked the key short-term lending rate or repo rate by 190 bps in four tranches since May this year in order to contain inflation which remains above RBI’s threshold of 6%. “We expect a 35 bps rate hike in the upcoming meeting. The Consumer Price Index (CPI) inflation is likely to moderate further in the coming months and slip below 6% by the end of the fiscal year,” said Rajani Sinha, Chief Economist, CARE Ratings.
MPC likely to go for 35 bps rate hike
“The RBI’s December policy meeting will likely see the MPC hiking repo rate by 35 bps; lower than the last three hikes of 50 bps. However, the decision is unlikely to be unanimous. The domestic inflation trajectory while remaining above the upper limit of the RBI’s inflation target band is gradually moderating. Domestic demand remains steady though risks of a global demand slowdown are increasing which is likely to impinge on India’s growth. The external sector situation remains uncertain. Inflation in most developed economies remains elevated but showing signs of peaking,” said Suvodeep Rakshit, Chief Economist, Kotak Instituitonal Equities.
“The US Fed has not surprised with a more-than-expected hawkish statement along with indications of a slower pace of hikes. Commodity prices have also come off, and recent fall in crude prices is also encouraging though uncertain whether it will sustain. These factors will provide some confidence to the RBI in slowing the pace of rate hikes and, possibly, pausing soon to assess the impact of the past rate hikes. However, a sticky core inflation and, more recently, higher cereal prices and increasing food inflation will keep the RBI cautious. A 35 bps hike will signal a mix of cautiousness and comfort while keeping all options open (including a pause or a smaller hike) for the February policy depending on the conditions,” he added.
“While we continue to peg GDP growth at 7.0% given the reasonably healthy domestic demand, downside risks to the forecast have increased due to the intense global headwinds. We continue with our expectations of a moderate hike of 30-35 bps in the repo rate in Dec-22 as the growth data has been in line with RBI’s forecasts,” said Suman Chowdhury, Chief Analytical Officer, Acuité Ratings & Research.
MPC focus may to assessing impact of past policy actions
“Having orchestrated a little more than two and a half percent move in the overnight operative rate through policy rate hikes and liquidity unwind measures, the monetary policy committee (MPC) can now afford to embark on baby steps from here on. Incremental momentum in inflation is showing signs of moderation owing to falling commodity prices amidst global growth slowdown. Hence MPC focus can shift to assessing the lagged impact of past policy actions. We expect a 25 bps in the coming policy and a data-dependent stance going forward,” said Radhavi Deshpande, Joint President & Chief Investment Officer, Kotak Mahindra Life Insurance Company, said.
50 bps rate hike not ruled out
“Going forward, real GDP growth is likely to be around 4.5% on-year in 2HFY23, leading to 7% growth in FY23. July-September GDP growth data is unlikely to influence RBI monetary policy. Though the consensus is a hike of 35 bps on 7 December, a 50 bps hike cannot be ruled out. US payroll data on 2 December will be a decider,” said Nikhil Gupta, Chief Economist, Motilal Oswal Financial Services.
MPC may hint at likelihood of pause in monetary tightening
“We are witnessing early signs of peaking inflation as a result of sharp monetary tightening witnessed in recent past. Since monetary policy acts with a lag, the monetary policy committee (MPC) may want to take a bit of a breather in its fight against inflation to assess the impact of past policy actions. In light of the above, upcoming policy meeting may see only a 25 bps policy rate hike. The MPC may also hint at likelihood of a subsequent pause in monetary tightening, especially if CPI inflation continues its downward trajectory in coming months. However, a pause in policy tightening, if any, should not be interpreted as promise of a Pivot just yet,” said Churchil Bhatt, Executive Vice President & Debt Fund Manager, Kotak Mahindra Life Insurance Company.
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MPC stance may shift from “withdrawal of accommodation” to “neutral”
“Federal Reserve is likely to raise rates by 50 bps in Dec 22 policy, hiking overnight rates by cumulative 425 bps during CY 2022. Average CPI in India for FY24 is expected in the band of 5.00-5.25%. Assuming 100 bps real rates, terminal repo rate in India could be ~ 6.25%. We expect 35 bps hike in the Dec 22 policy, along with change in monetary policy stance from “withdrawal of accommodation” to “neutral” indicating further action to be data dependent. Post this hike, the overnight rates in India would have increased by ~ 300 bps during CY 2022,” said Deepak Agrawal, CIO (Debt), Kotak Mahindra Asset Management Company.