All eyes are on the Reserve Bank of India’s Monetary Policy Committee (MPC) as it began its bi-monthly policy review session on Monday, 5 December. Analysts expect that the RBI MPC is set to announce further repo rate hikes amid elevated inflation, geopolitical tensions and fears of a global recession, on Wednesday, 7 December, once the three-day review session has concluded. The consensus among most experts states that the repo rate will be hiked by 25-35 basis points; the repo rate currently stands at 5.9%. The RBI Governor, Shaktikanta Das, will announce the committee’s policy decisions which will be closely watched by the market for further cues.
Effect of inflation on the RBI’s Policy
Domestic retail inflation remains above the RBI’s upper threshold of 6% for the tenth consecutive month at 6.7%. However, “There is a sign of inflation cooling off as CPI-based inflation in October is at its three-month low of 6.7%,” said Ravi Subramanian, MD & CEO, Shriram Housing Finance. Since inflation has eased off, Aditya Damani, Founder and CEO, Credit Fair, said, “Current inflationary pressures are largely imported, and we shouldn’t worry much about it.” Umesh Mohanan, Executive Director & CEO, Indel Money, believes that the CPI inflation rate will soon moderate and fit within the RBI’s limit due to falling commodity prices, and as a result, the hike of the repo rate will be smaller. “As on expected lines, inflationary trends would start showing a decline in the fourth quarter of the current fiscal,” adds Shanti Ekambaram, Whole-time Director, Kotak Mahindra Bank.
How US Fed’s stance affects the MPC’s decision
There is a unanimous acknowledgement that the Indian central bank closely monitors and looks for cues from the US Federal Reserve. This is primarily important since the MPC will be convening prior to the next US Fed meeting, and a significant increase in the US Fed’s rate will have a significant bearing on the exchange rate, said Rahul Chander, MD & CEO of LivFin.
However, “Powell’s speech was relatively less hawkish as compared to other Fed members’ views over the past two weeks,” stated Deepak Agrawal, Chief Investment Officer, Debt Fund, KMAMC. As a result of this, Shanti Ekambaram, Whole-time Director, Kotak Mahindra Bank said, “We expect a lower rate hike from the RBI given the last lower inflation reading and a slight softening in Fed speak.”
India’s economic outlook
The change in the RBI’s repo rate will have a significant impact on India’s economy. Especially since a degrowth was seen in the core sectors of the economy, such as industry and manufacturing in the Q2 FY23 GDP print, according to Shishir Baijal, Chairman and Managing Director, Knight Frank India. Aditya Damani, Founder and CEO of Credit Fair said, “The domestic situation warrants some serious measures to sustain growth. Though the Q2 GDP numbers are in line with RBI’s expectations, rating agencies and institutions are revising India’s growth rate downwards, given the global headwinds.”
“Despite multiple global headwinds in the face of geopolitical tensions and global economic volatility, India’s structural stability has stood it in good stead largely due to robust domestic consumption and active steps taken via monetary and fiscal policies,” adds Virat Diwanji, Group President & Head – Consumer Bank, Kotak Mahindra Bank, holding a contrary opinion.
Repo rate hike expectations
There is a definite consensus among experts that the rate will be hiked between 25 to 35 bps. “We expect a 35 bps hike in the December policy, along with a 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, Chief Investment Officer, Debt Fund, KMAMC. “However, the repo rate touching the 6.2 percentage levels in a period of eight months is a bit tricky and, going forward, it will affect consumer sentiments,” stated Aditya Damani, Founder and CEO, Credit Fair.