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RBI may hike repo rate by 25 bps: Poll
MPC is likely to keep the policy stance unchanged, say economists
The Reserve Bank of India’s monetary policy committee (MPC) will likely announce the first rate hike of the new financial year this week in light of sustained inflationary pressure, a Mint survey showed.
Thirteen of the 15 economists in the survey expect the rate-setting panel to raise the repo rate by 25 basis points to 6.75% before pausing interest rate changes for the rest of the year. However, economists from State Bank of India and Nomura expect a pause to start with the April policy itself.
Most economists also expect the MPC to keep the policy stance unchanged at “withdrawal of accommodation”. Only three economists expect a change in stance to neutral.
The panel is expected to announce its policy decision following a three-day meeting ending on 6 April.
“We maintain our baseline that RBI will hike the repo rate by 25bp (basis points) in the 6 April policy meeting, as we forecast Q1CY23 headline inflation to be 50bp above RBI’s forecast from the February meeting, along with persistent core inflation pressures, and see upside risk to food inflation in Q2. This will take the repo rate to 6.75%, the peak rate in our forecast, as the RBI is likely to turn data-dependent thereafter, in our view. With considerable uncertainty around the commodity prices path and global growth, RBI is likely to retain the tightening policy stance,’ said Goldman Sachs Economic Research.
Nomura Global Market Research’s economists Sonal Varma and Aurodeep Nandi, however, believe that RBI could remain on hold in April due to the benign forward inflation profile, lagged monetary policy effects, worsening US financial/economic outlooks, and weaker domestic demand outlook in FY24. In fact, they expect a rate-cutting cycle this year as both growth and inflation show a softening trend.
Since the last policy in February, consumer price inflation has inched up. After slowing to 5.7% in December, CPI inflation reversed the trend and breached the 6% mark in January and February. The average CPI inflation for Q4 FY23 is expected to surpass RBI’s estimate of 5.7%.
Recent economic data also shows mixed signals on growth. While domestic demand impulses have supported growth momentum, some weakness has been observed in the country’s manufacturing and external sectors.
Moreover, the global economic environment has deteriorated since the previous policy, owing to recent bank failures, which could constrain growth but may not be significant enough to force the US Federal Reserve to start monetary easing. As a result, economists predict that the MPC will maintain its growth forecast for FY23 at 6.4%, while some economists anticipate a revision to the RBI’s FY23 inflation estimate of 5.3%.
“We expect the RBI to revise its inflation forecast for FY23 slightly upwards. For FY24, their inflation forecasts will be mostly unchanged, with risks of a small downward revision. RBI can potentially mark its assumptions, especially for oil lower, but since the lower oil prices are not being passed on, and there is some weather-related uncertainty, RBI can continue to keep inflation projections unchanged for now,” said Rahul Bajoria, chief economist, Barclays Securities India. Besides this, MPC could also offer its assessment of the current liquidity situation, which has turned deficit since the last MPC meeting. This was largely on account of fiscal year-end tax outflows from the system and redemption of Long Term Repo Operations (LTROs) in February and March. A faster pace of credit growth than deposit growth also added to the stress. In the coming months, markets expect liquidity to remain under pressure due to TLTRO redemptions scheduled in April. Both LTROs and TLTROs were emergency measures announced by RBI during the pandemic to infuse liquidity into the system. Economists expect RBI to keep liquidity in the system marginally in surplus to support growth.
“At the rate review, policymakers are likely to stay non-committal on permanent liquidity support despite upcoming TLTRO maturities. While the central bank might step in to thaw conditions via ad hoc variable repo rate operations, preference will be to keep the net liquidity balance close to the non-inflationary neutral or slight deficit, with relief expected by way of government spending or likely return in portfolio inflows,” said Radhika Rao, chief India economist, DBS Bank.
Between 10 February and 24 March, RBI injected ₹1.89 trillion through variable repo rate auctions.
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Business NewsEconomyRBI may hike repo rate by 25 bps: Poll
First Published:2 Apr 2023, 10:54 PM IST
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