The Reserve Bank of India’s (RBI) MPC is expected to raise repo rate by 25 basis points before taking a pause, in the bi-monthly monetary policy to be announced on April 6. “With core inflation still above 6 per cent and the threat of rising food inflation, RBI may hike the repo rate one more time by 25 bps, before hitting the pause button in this cycle,” said Rajani Sinha, Chief Economist, CareEdge. The RBI started its three-day review meeting on April 3. According to experts and economists, this will probably be the last in the current monetary tightening cycle that began in May 2022. In the past one year, the RBI has raised repo rate six times including an off-cycle increase of 40 basis points in May last year. The decision of the six-member panel will be announced by RBI Governor Shaktikanta Das on April 6.
“Given that Federal Reserve & European Central Bank have gone ahead with rate hike in spite of recent global developments and Q4FY23 inflation numbers are higher than RBI projections, RBI will hike repo rate by 25 bps to 6.75 per cent,” said Deepak Agrawal, CIO – Debt, Kotak Mahindra AMC.
The repo rate is the key rate at which the central bank lends money to banks. Currently, it’s at 6.50 per cent – the highest level since February 2019. If the RBI announces another 25 bps rate hike tomorrow, the repo rate will hit the highest level since April 2016. “In India, CPI remains above the 6 per cent threshold, including core inflation which remains sticky. Though CPI is likely to trend lower in the coming months, the probability of a 25 bps rate hike in the upcoming MPC seems high. To hike or not to hike could be the most discussed agenda as the clamour for a pause seems to be only growing,” said Lakshmi Iyer, CEO – Investment & Strategy, Kotak Investment Advisors Limited.
RBI MPC likely to follow US Fed, ECB leads
The RBI decision to hike the interest rate will be supported by hikes of 50 bps and 25 bps respectively by ECB and the US Fed in March. While incremental rate hikes from these two banks will depend on “how incoming macro data and financial markets conditions evolve over the next few weeks and months”, RBI has a difficult task as it tries to manage to moderate domestic growth and sticky core inflation, Lakshmi Iyer said. “The course of rate hike is more likely to be aligned with the stance taken by key central banks such as the US Fed,” said Shishir Baijal, Chairman & Managing Director, Knight Frank India. “The recent crude oil production cut by OPEC and Russia consumer inflation is unlikely to ebb anytime soon. Consumer inflation in the core categories (ex-food and fuel) as well has stayed persistently high above 6 per cent for the last 22 months,” he said, adding that RBI will announce a hike by 25 bps as inflation continues to be a lingering problem.
Unseasonal rains, weather to play spoilsport
Not only the current macroeconomic uncertainties in the country and sticky inflation, the unseasonal rains in some parts of the country damaging crops is another pressing factor for inflation control requirements. “Inflation in India is still being pushed higher by fuel prices despite OPEC’s recent announcement to reduce oil production. Also, we continue to expect that the next policy will raise rates by 25 bps due to the unseasonably early rainfall in some parts of the country that have an influence on the crops,” said Sharad Chandra Shukla, Director, Mehta Equities Ltd.