'Status Quo' or 'Last hike': What will be RBI's decision in the last monetary policy of FY23?
5 min read . Updated: 07 Feb 2023, 02:40 PM IST
Premium- The rate hike cycle in FY23 began in May 2022, when RBI hiked the policy rate by 40 bps. This followed a 50 bps hike three times in a row between June to October policies, until RBI softened its rate hike to 35 bps in December 2022 policy.
All eyes are set on RBI who will be presenting the last bi-monthly monetary policy of FY23 on Wednesday. With inflation staying well below the central bank's tolerance limit for two months straight, the majority of experts are predicting a 25 bps rate hike in the coming policy. But if we look beyond the rate hike size conundrum, there are more important factors that we need to watch out for.
These would be: Is there a possibility for a 'status quo' rather than a rate hike in the upcoming policy? Or, if there is a rate hike, will it be the last one?
Inflation which was stubbornly at a multi-year high and above RBI's upper tolerance limit of 6% between January to October last year --- had pushed the central bank to take an aggressive approach to monetary policy, especially the key repo rate.
The rate hike cycle in FY23 began in May 2022, when RBI hiked the policy rate by 40 bps. This followed a 50 bps hike three times in a row between June to October policies, until RBI softened its rate hike to 35 bps in December 2022 policy.
That said, so far in FY23, RBI has increased the repo rate by 225 bps.
Nevertheless, the repo rate is at its highest level since August 2018, at 6.25%. Consequently, the standing deposit facility (SDF) rate stands adjusted to 6%, and the marginal standing facility (MSF) rate and the Bank Rate to 6.50% as of now.
While the rate hike size did witness a slight trim in December policy, however, MPC members have remained focused on the withdrawal of accommodation to ensure that inflation remains within the target going forward while supporting growth.
RBI is an inflation trajectory government and its policy outcomes surround the performance of the consumer price index (CPI).
India's inflation has eased merrier-than-expected to 5.72% in December 2022 --- which is the lowest reading since December 2021. Also, this would be the second month when inflation has come under RBI's tolerance limit. In November, inflation was at 5.88%.
So what can we expect from RBI in the last bi-monthly monetary policy?
Umesh Kumar Mehta, CIO, of SAMCO MF said, "given, how well the RBI has controlled inflation in recent months, we anticipate that it will soon align with the government's preference for growth. Through recent reforms on taxation front, the government seems to have changed the rules to shift India's economy from one focused on savings to one driven by consumption."
Mehta added, "This week a status quo is expected or at the best, one last hike, and then rate hikes could be paused. We anticipate a halt in interest rate hikes in the subsequent next months, followed by the reversal in rates starting next year."
RBI does have the option to pause and assess the impact of rate hikes.
Although estimating a 25 bps rate hike in the last policy of FY23, analysts at Emkay Global in their note also said, "a 25bps hike would imply the ex-ante real rates around 1% – keeping one-year forward inflation forecast as the anchor."
As per Emkay analysts, this technically means the RBI may (i) choose to pause and assess the impact of past hikes, albeit still remaining data-dependent, and (ii) maintain the current stance of “withdrawal of accommodation" to keep policy flexibility ahead.
However, Emkay's analysts re-emphasize that the situation globally is still fluid, and macro assessments might require frequent adjustments ahead from the policy perspective.
Also, Deepak Agrawal, CIO- Of debt, Kotak Mahindra Asset Management Company does not see a case for a rate hike in the Feb 23 policy.
But Agarwal said, "Given that real rates are likely to be 100 bps higher than FY 24 inflation, we don’t see a case for a rate hike in the Feb 23 policy. However, due to sticky core inflation and narrowing interest rate differential with US, RBI may deliver final rate hike of 25 bps. We also expect the monetary policy stance to be changed from “withdrawal of accommodation" to “neutral" indicating that further monetary actions would be data dependent."
In regards to inflation, Suvodeep Rakshit Senior Economist, Kotak Institutional Equities said, the RBI MPC will view the recent inflation prints favorably. 3QFY23 CPI inflation at 6.1% is around 50 bps lower than RBI’s estimate and 4QFY23 inflation is also likely to be 20-30 bps lower than RBI’s estimate. It added, "We estimate inflation to average around 5.2% over the next 12-15 months."
Rakshit added, "While the MPC’s decision is finely balanced between pause and a 25 bps hike, we expect the MPC to hike by a last 25 bps to push the real rate comfortably into positive. This would help the RBI to be on a prolonged pause as it assesses the lagged impact of the past rate hikes and input price movements, the evolution of the global and domestic demand conditions, and behavior of global central banks."
In regards to the shift in stances, Jyoti Prakash Gadia- Managing Director at Resurgent India expects it to likely shift to neutral while keeping a close watch on liquidity. She added, "next year higher borrowings by the government will also need to be factored in by RBI while reviewing the repo rate with an eye on the changing interest rate cycle."
It needs to be noted that many global central banks continue to stay hawkish tone. Recently, the US Federal Reserve hiked the key rate by 25 bps, while the Bank of England and European Central Bank raised their important rate by 50 bps each.
Sonam Srivastava, Founder and CEO at Wright Research, said, still as the global central banks continue the hawkish tone, the RBI might also not turn outright dovish but may present a slightly milder stance. RBI will remain data-driven and aware of the global macroeconomic scenario. She added, "We would also appreciate the RBI comments on ongoing equity market crisis and fraud charges."
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