RBI repo rate rate hike expected to reach terminal level early in 2023: Reuters Poll
2 min read 02 Jun 2022, 11:01 AM ISTAccording to a Reuters poll of analysts, the repo rate is expected to reach its terminal level early in 2023.
PremiumAccording to a Reuters poll of analysts, the Reserve Bank of India (RBI) will focus on interest rate hikes in the coming months as part of a relatively brief tightening cycle, with the repo rate expected to reach its terminal level early in 2023. Following a surprise rate hike on May 4, several members of the Monetary Policy Committee (MPC) advocated for even more in upcoming sessions this year to keep sticky price pressures under control, which reached an eight-year high in May. The central bank is expected to hike its benchmark policy rate by at least 100 basis points during the next four MPC meetings, according to a Reuters poll.
The RBI was expected to follow up its unplanned 40 basis point repo rate hike to 4.40 percent in May with another move at its policy meeting on June 8, which Governor Shaktikanta Das described as a "no-brainer." The extent of the difference was unclear because forecasts were split six ways, ranging from 25 to 75 basis points. This is just slightly different from a similar survey performed a month ago, which found a seven-way split.
According to 41 of 47 respondents, the repo rate is likely to reach or exceed its pre-pandemic level of 5.15 percent next quarter. It will conclude the year at 5.50 percent, according to the median, 110 basis points higher than it is today, and 19 of 47 people thought it would go even higher.
"Most of the hikes will come this year and we expect this cycle to end in April next year...the urgency for more hikes will continue to diminish from Q4 (2022) onwards," said Miguel Chanco, chief emerging Asia economist at Pantheon Macroeconomics.
Indeed, the predicted tightening path for next year was more subdued with only 40 basis points pencilled in the first half before a pause, poll medians showed.
"The RBI was very much behind the curve in terms of its thinking on inflation and what to do on interest rates. It still seems to me they have rose tinted glasses in terms of the future outlook of prices," Chanco added.
While inflation is expected to remain high due to high global energy and food costs, economic growth prospects have begun to dim. Last quarter, GDP growth dropped to its slowest in a year, the third consecutive downturn.
This could cause the RBI to contemplate stopping the tightening cycle less than a year after it began, despite the fact that it had previously prioritised growth over inflation, maintaining rates constant until unexpectedly boosting them at an unannounced meeting.
When asked what the terminal repo rate would be, 14 of 26 economists said 6.00% or higher, while the rest pencilled in a lower rate. Forecasts ranged from 5.15-6.50%.
Nearly two-thirds of respondents, 17, said the terminal rate would be reached by end-Q2 2023, roughly in line with the median from the quarterly forecasts. Six said the second half of 2023, while only three said the cycle would go on until 2024.
But economists said much would depend on price pressures over the coming months.
Suvodeep Rakshit, senior economist at Kotak Institutional Equities, said if inflation were to remain in the 6%-7% range well into the current and next fiscal year, the terminal rate would have to be higher than he currently expects.
"We have to shift it (the terminal rate) higher, closer to where you're seeing your one-year-ahead inflation pan out. It is not a number cast in stone, it will evolve along with the inflation trajectory."
(With Reuters inputs)
