Home / News / India /  If not 50 bps, then by how much RBI should hike repo rate in Dec policy meet?
Back

If not 50 bps, then by how much RBI should hike repo rate in Dec policy meet?

RBI's medium-term target for CPI inflation is 4% within a band of +/- 2%. This means RBI's upper tolerance limit for CPI is 6%.Premium
RBI's medium-term target for CPI inflation is 4% within a band of +/- 2%. This means RBI's upper tolerance limit for CPI is 6%.

  • Since May this year, RBI has hiked the repo rate by a whopping 190 basis points, all done for taming a stubbornly multi-year high inflation. RBI has increased the key rate by 50 basis points for the third consecutive policy. But things changed in October when CPI eased to below the 7% mark.

RBI is an inflation trajectory central bank and its policy outcomes surround the performance of the consumer price index (CPI). Once again, all eyes will be set on RBI which is going to present its bi-monthly monetary policy on December 7, 2022. Since May this year, RBI has hiked the repo rate by a whopping 190 basis points, all done for taming a stubbornly multi-year high inflation. RBI has increased the key rate by 50 basis points for the third consecutive policy. But things changed in October when CPI eased to below the 7% mark. Does that indicate a smaller size rate hike by RBI in the upcoming policy? If not a 50 basis points hike, then what is a potential rate hike that can be expected in the December policy?

The first hike for FY23 was in May by 40 basis points in repo rate followed by three straight 50 basis points hikes between June to September 2022. Now, the policy repo rate is around 5.90%. While the standing deposit facility (SDF) rate stands adjusted to 5.65% and the marginal standing facility (MSF) rate and the Bank Rate to 6.15%. The rate hike trend has led to a significant jump in banks' deposit and lending rates as well.

MCP remains focused on the withdrawal of accommodation to ensure that inflation remains within the target going forward while supporting growth.

Let's understand a few pointers! Firstly, RBI's medium-term target for CPI inflation is 4% within a band of +/- 2%. This means RBI's upper tolerance limit for CPI is 6%.

Secondly, inflation has stayed above RBI's upper tolerance limit for the tenth consecutive month this year. The last time inflation was around RBI's tolerance limit of 6% was in January 2022.

The latest inflation data showed that the CPI eased to 6.77% in October on the back of slower rises in food prices and a strong base effect. This is far better than a five-month high of 7.41% in September 2022.

In its latest November 2022 bulletin, RBI said, "With headline inflation beginning to show signs of easing, the domestic macroeconomic outlook can best be characterised as resilient but sensitive to formidable global headwinds. Urban demand appears robust, rural demand is muted but more recently picking up traction."

However, RBI also said that domestic inflation remains elevated. It added, "We are closely monitoring the inflation trends as well as the effect of our past actions. In our view, price stability, sustained growth, and financial stability need not be mutually exclusive."

RBI has refined its inflation forecasting methodology by incorporating new techniques and is delving deep into the granularity of inflation projections.

In the previous policy (October 2022), RBI factored CPI inflation to be at 6.7% by FY23-end which is still higher than the central bank's upper tolerance limit. However, RBI expects inflation to fall below 6% in Q4FY23 to around 5.8%. CPI for Q1 of FY24 is projected at 5%.

So can we expect a smaller size rate hike by RBI in December policy?

Suvodeep Rakshit, Chief Economist, Kotak Institutional Equities said, "the RBI’s December policy meeting will likely see the MPC hiking repo rate by 35 bps; lower than the last three hikes of 50 bps. However, the decision is unlikely to be unanimous."

According to the economist, the domestic inflation trajectory while remaining above the upper limit of the RBI’s inflation target band is gradually moderating. Domestic demand remains steady though risks of a global demand slowdown are increasing which is likely to impinge on India’s growth. The external sector situation remains uncertain.

He said, inflation in most developed economies remains elevated but showing signs of peaking.

Also, the economist said, the US Fed has not surprised with a more-than-expected hawkish statement along with indications of a slower pace of hikes. Commodity prices have also come off, and the recent fall in crude prices is also encouraging though uncertain whether it will sustain.

In Rakshit's view, these factors will provide some confidence to the RBI in slowing the pace of rate hikes and, possibly, pausing soon to assess the impact of the past rate hikes.

However, he also added, "a sticky core inflation and, more recently, higher cereal prices and increasing food inflation will keep the RBI cautious."

"A 35 bps hike will signal a mix of cautiousness and comfort while keeping all options open (including a pause or a smaller hike) for the February policy depending on the conditions," the economist said.

The next meeting of the MPC is scheduled during December 5-7, 2022.

 

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint.

Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
More Less

Recommended For You

Trending Stocks

×
Get alerts on WhatsApp
Set Preferences My ReadsWatchlistFeedbackRedeem a Gift CardLogout