BackRBI to hike repo rate by 25 bps in Feb as inflation continues to moderate: Barclays
This is likely to be the last hike in an aggressive tightening cycle, as real rates turn materially positive in coming months, said BarclaysThe bank also said that the risk of a pause in February is low, but not zero
PremiumThe Reserve Bank of India's (RBI) Monetary Policy Committee (MPC) is expected to deliver another 25 basis points (bps) rate hike at the 6-8 February meeting, bringing the repo rate to 6.50%, with the need for larger hikes declining rapidly amid falling inflation and moderating imported price headwinds, said Barclays in a report.
The RBI's MPC is scheduled to meet during 6-8 February, which will be the first this year. RBI Governor Shaktikanta Das will announce the MPC decision on Wednesday, the last date of the meeting.
The London-headquartered banks expects the February rate hike to be the last in this cycle, but also believe that it's too early for the RBI to cut rates, as inflation is likely to be hovering around 5-5.5% by end of 2023, which may prevent an early reversal in rates.
The risk of a pause in February is low, but not zero
The bank said that the risk of a pause in February is low, but not zero. "Still, another rate hike is not a straightforward decision and is likely to be contested by at least two members of the MPC," it noted.
With inflation reverting to within the central bank's target range, Barclays said both Jayanth Varma and Ashima Goyal are likely to vote against a hike. “We would not rule out the prospect of Governor Das casting the deciding vote if the committee is evenly split," it said.
However, the governor has been relatively hawkish in this cycle and may try to persuade the MPC to vote together, the bank stated.
India's retail inflation cooled to a one-year low in December, staying below the RBI's upper tolerance limit of 6% for the second straight month.
"Headline inflation back in the target range – and below the RBI’s projections – is increasing the room for dissent in the MPC, with at least two members likely to vote to keep rates on hold, in our view. This means the possibility of an on-hold decision is nonnegligible, but given elevated core CPI and recent comments by Governor Shaktikanta Das, we still believe a 25bp hike is the most likely step in February," the bank said.
The bank expects the policy stance to be changed to neutral, where it was last in December 2018, when the repo was 6.50%. "Furthermore, inflation has begun to moderate and appears set to drop further in coming months," the report stated.
'Inflation appears to be moderating globally'
Inflation appears to be moderating worldwide and in India in particular, pushing up real rates. "Realised inflation has now undershot RBI's forecasts for two consecutive quarters, and in our view it is likely that the RBI will lower its inflation projections, given that pressure from global commodity prices and domestic food prices is ebbing," the bank noted.
The RBI's MPC will also likely take note of the shift in the synchronised global policy tightening.
While central banks in developed economies continue to raise rates, albeit in smaller increments, several Asian central banks have either paused or signalled a desire to take a breather, as the region reels from weaker global growth and tight monetary policy. China's reopening is a positive development, but is unlikely to be a game changer for India in the near term with respect to a material shift in monetary policy, the report said.
On India's macroeconomic backdrop
With growth resilient and inflation declining, the country's macroeconomic backdrop is improving, and the central bank may feel it needs to wait and see regarding the need for further policy tightening, based on incoming data, Barclays said.
On liquidity, transmission continues to improve, as liquidity conditions tighten and the gap between deposit and credit growth remains large. Still, we do not see room for RBI to inject liquidity in the near term, as it likely will wait for more transmission of its rate hikes into deposit rates, the bank said.
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