RBI may hike rate by up to 50 bps as inflation edges up
3 min read 13 Sep 2022, 11:44 PM ISTAn aggressive 50-bps increase in the repo rate would take the policy rate to 5.9%, the highest in more than three years. It will also be the third consecutive rate hike of 50 bps in the current tightening cycle, beginning with a 40-bps surprise increase in May
PremiumMUMBAI : As retail inflation accelerated again to 7% in August, there is a growing chorus among economists for another 35-50-basis point (bps) repo rate hike in the September policy, a move some fear could stymie growth.
An aggressive 50-bps increase in the repo rate would take the policy rate to 5.9%, the highest in more than three years. It will also be the third consecutive rate hike of 50 bps in the current tightening cycle, beginning with a 40-bps surprise increase in May.
Another round of steep hikes, experts said, has been necessitated by the unabated rise in inflation as measured by the Consumer Price Index (CPI), primarily because of higher food prices.
“We now expect the US Federal Reserve to hike by 75 bps this month, against our earlier expectations of a 50-bps hike, which will likely push RBI and the MPC to hike the repo rate by 35 bps, against our earlier expectations of 25 bps," said Kaushik Das, chief economist, India and South Asia, Deutsche Bank.
He expects two more rate hikes of 25 bps each in December and February, which, along with the expected 35 bps in September, would take the terminal rate to 6.25%.
Given that inflation will likely stay above the monetary policy committee’s flexible target of 2-6% for three quarters in a row, the central bank will have to write to the government in October, explaining the reasons behind this deviation.
Retail inflation in August, at 7%, was 10 bps higher than Deutsche Bank and Bloomberg’s consensus estimate of 6.9%, Das said.
Retail inflation had eased to 6.71% in July after peaking at 7.8% in April. In its August policy, RBI’s monetary policy panel had projected inflation at 6.7% in FY23, with July-September at 7.1%, October-December at 6.4%, and January-March at 5.8%.
While RBI is likely to raise the repo rate between 35-50 bps in September, there will be token increases after this month as inflation is expected to trend lower, said Soumya Kanti Ghosh, group chief economic advisor at State Bank of India.
Ghosh said that of the 299 commodities in CPI, 171 are categorized as supply-driven, 99 as demand-driven, and 29 as neutral. SBI’s research showed that supply side factors, which were responsible for 65% of CPI inflation in May and had dropped to 58% in July, have increased to 61% in August, possibly reflecting the increase in unseasonal rains. Clearly, the jump in inflation in India continues to be a byproduct of supply disruptions, he said.
Although a 35-50 bps rate hike seems somewhat inevitable now, experts said RBI would have to tread cautiously so as to not disrupt the growth momentum. The economy grew 13.5% in the first three months of the financial year, lower than RBI’s estimate of 16.2%. In fact, RBI governor Shaktikanta Das said in a recent interview that RBI would focus on minimizing the growth sacrifice while curbing inflation.
Ghosh of SBI estimates that the repo rate hike of 140 bps between May and August will eventually increase interest costs by about ₹42,500 crore for retail and small business borrowers, thereby impacting growth.
“The government continued to step up its efforts at containing supply side inflation with its steps to ban exports of wheat, atta and now broken rice, raising export duty on certain items, reducing duties on edible oil, cutting excise duty on petrol and diesel, and not allowing the oil marketing companies (OMCs) to pass on any increases in prices of petrol and diesel to end users," said Indranil Pan, chief economist, Yes Bank. “Even as growth surprised on the lower side—from RBI’s own expected levels—for Q1 FY23, we do not see the RBI pulling its feet away from the pedal immediately."
