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The Reserve Bank of India (RBI) is likely to raise the repo rate by 25 basis points (bps) in the upcoming monetary policy to rein in inflation which is hovering above its comfort zone, say bankers and analysts.
However, many are also of the view that the central bank may pause to see the impact of the global banking crisis.
The six-member Monetary Policy Committee (MPC) will meet from April 3-6.
“We maintain our baseline that the RBI will hike the repo rate by 25bps in the April 6 policy meeting, as we forecast Q1CY23 (fourth quarter of FY23) headline inflation to be 50 bps above the RBI’s forecast from the February meeting, along with persistent core inflation pressures, and see upside risk to food inflation in Q2 (April-June 2023),” Goldman Sachs said in a recent report.
The RBI began its rate hike cycle in May 2022 and has hiked the repo rate by 250 bps to 6.5 per cent. The consumer price-based inflation (CPI) stood at 6.44 per cent in February compared to 6.52 per cent in January. Retail inflation continues to remain above the upper band of the RBI’s 2-6 per cent target.
The RBI in its February monetary policy had projected inflation to be at 6.5 per cent in 2022-23, with Q4 (January-March 2023) at 5.7 per cent. For FY24, the central bank has projected CPI at 5.3 per cent for 2023-24, with Q1 (April-June) at 5 per cent and Q2 (July-September) at 5.4 per cent.
Care Ratings Chief Economist Rajani Sinha said the expectation of the Federal Reserve continuing its rate hike cycle to control inflation may support the RBI’s decision to raise the repo rate in the April meeting before pressing the pause button.
“We expect RBI to hike the repo rate by 25 bps in April to 6.75 per cent,” she said.
According to DBS Group Research’s Executive Director & Senior Economist Radhika Rao, upside risk to RBI’s Q1 2023 inflation forecast, firm core prints and above-target CPI in January-February 2023, are likely to see a majority of the MPC vote for a 25 bps hike in April with an unchanged stance.
In its April 2022 policy, the MPC had decided to remain accommodative while focusing on the ‘withdrawal of accommodation’ to ensure that inflation remains within the target going forward while supporting growth. Since then, the RBI has been maintaining the same stance.
“We are expecting a 25 basis points (bps) hike but with a significant probability of a pause. There is a 60 per cent chance of (repo rate) hike and 40 per cent chance of no hike with fairly hawkish commentary,” HDFC Bank’s Chief Economist and Executive Vice President Abheek Barua said.
He said the pause could be because of the global systemic and financial stability issues, so, the RBI might want to wait during the April policy.
“Having done quite a bit, RBI is not facing as much challenge on inflation, especially with oil and commodity prices temporarily coming off. They can use it (lower oil, commodity prices) as the reason to say that let’s just wait for inflation to get affected positively because of this (fall in oil, commodity prices),” Barua said.
Given the financial stability problem globally, which might not hit India directly but there is a negative sentiment for financial institutions, RBI may give some breather to the system, he said.
Last month, the collapse of three US-based banks – Silicon Valley Bank (SVB), Signature Bank and First Republic Bank, and Swiss lender Credit Suisse roiled the global financial and stock markets.
State Bank of India’s (SBI) Group Chief Economic Adviser Soumya Kanti Ghosh said he expects the status quo from RBI in the April MPC meeting.
Considering the repo rate is already around 25 bps higher than the optimal requirement (basis CPI, core CPI and Fed rate), 6.5 per cent repo rate could be considered as terminal rate, he said.
In a report last month, Nomura said, “In contrast to consensus expectations of a 25 basis points (bps) hike, we expect the RBI to remain on hold in April owing to – the benign forward inflation profile; lagged monetary policy effects; worsening US financial/economic outlooks; and weaker domestic demand outlook in FY24.
It sees a higher probability to a pause (80 per cent) than to a 25 bps hike (20 per cent).
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