RBI Governor Shaktikanta Das today announced a 0.25% hike in repo rates with immediate effect. The question now arises whether the economy will require further tightening and as a consequence, whether RBI will announce its seventh rate hike in a row. Das highlighted that a “further calibrated monetary policy action is warranted to keep inflation expectations anchored and break the persistence of core inflation”. Underlining the uncertainties present in the economy due to geopolitical tensions, global financial market volatility, rising non-oil commodity prices, and volatile crude oil prices, he said, “The MPC will continue to maintain a strong vigil on the evolving inflation outlook so as to ensure that it remains within the tolerance band and progressively aligns with the target.”
Experts seem to maintain an overall consensus when it comes to not expecting RBI to hike the rates any further. Deepak Agrawal, CIO – Debt, Kotak Mahindra Asset Management Company said, “Core Inflation and Financial Stability concern led to “withdrawal of accommodation” stance being maintained as against market consensus. Based on RBI’s forward-looking FY24 inflation forecast of 5.30%, at 6.5% repo rate, the real rate is 1.25%. We believe this is the last rate hike in this cycle.”
An interesting point to note, said Manish Chowdhury, Head of Research at STOXBOX, is that there were two members in the MPC who voted for a no increase in rates this meeting, compared to just one member in the previous meeting. “This actually signals that if the inflation continues to moderate with some support from global macro, the RBI could signal a change in stance in the next meeting,” he further noted.
Suvodeep Rakshit, Senior Economist, Kotak Institutional Equities said the RBI will remain concerned about core inflation for the foreseeable future, adding, “We expect inflation to average around 5.2% in FY2024 with adverse risks to growth likely to increase. The split mandate of 4-2 was as expected. The stance too was unchanged which is in line with the excess liquidity continuing to be tightened. The RBI will likely become increasingly data dependant and look at the impact of the past rate hikes on inflation-growth dynamics. We expect the RBI to pause from the next policy onwards with a likely shift in stance to neutral as the liquidity tightens further over March-April.”