When the Reserve Bank of India's monetary policy committee (MPC) met in February 2023, the repo rate was raised 25 basis points and there were clear signals in the commentary that there could be more hikes ahead. Since then, however, there have been several developments, more so in the developed economies, prompting many to wonder whether its time for central banks to hit the pause.
Amid a sharp increase in interest rates through out 2022 and early part of 2023, three regional US banks collapsed. As concerns spread, regulators in Europe, in a bid to avoid contagion, merged Swiss banking giant Credit Suisse with its rival UBS. Still the US Federal Reserve raised interest rate by 25 basis points (0.25 per cent) in March and the European Central Bank hiked rates by 50 bps.
With inflation remaining a key challenge back home, the RBI MPC too could deliver another rate hike of around 25 bps, say analysts.
The CPI (consumer price index) inflation in February eased slightly to 6.44 per cent from 6.52 per cent in January. However, its still trending above RBI's upper end of the targeted 2 per cent to 6 per cent band.
Food inflation, trending at 5.95 per cent in Feb, has been a concern, and unseasonal rains and hailstorms damaging crops in various states in March have added to the worries. Core inflation has also remained sticky for some time now around 6 per cent. These price pressures are likely to weigh more on the MPC's minds.
"We maintain our baseline that the RBI will hike the repo rate by 25 bps in the April 6 policy meeting, as we forecast Q1, 2023 headline inflation to be 50 bps above the RBI’s forecast from the February meeting, along with persistent core inflation pressures, and see upside risk to food inflation in Q2," said Santanu Sengupta, chief India economist at Goldman Sachs.
Since May 2022, the repo rate (benchmark rate at which RBI lends commercial banks) has been increased from 4 per cent to 6.50 per cent. The latest expected rate hike will take it to 6.75 per cent, which Sengupta feels will be the peak and the central bank will thereafter turn data dependent to decide on future action.
"With considerable uncertainty around the commodity prices path and global growth, the RBI is likely to retain the tightening policy stance," felt Sengupta.
While inflation has remained firm, there are mixed signals on the growth front. India's GDP grew 4.4 per cent in the October-December 2022 quarter, slower than the 6.3 per cent growth in July-September 2022. So, the RBI will need to walk a tightrope to achieve a delicate balance, opined Rajani Sinha, chief economist at CARE Ratings.
Still, Sinha also expects the central bank to raise rates by 25 bps on April 6, but the stance could be changed to "neutral" from "withdrawal of accommodation."
"The January and February spike in CPI inflation, combined with core inflation remaining above 6 per cent, may push the policy outcome in favour of one more rate hike. Moreover, the latest inflationary expectations data does not suggest a significant relief," she said.
Furthermore, the expectation of the US Fed continuing its rate hike cycle may support the RBI's decision to raise the repo rate in the April meeting before pressing the pause button, Sinha added.
Upasna Bhardwaj, chief economist at Kotak Mahindra Bank also sees the RBI delivering another rate hike, but believes it could be the final increase in the current cycle and a long pause could then be expected.
"The recent global developments will be weighing heavily during the policy decision-making by the MPC. With domestic inflation also remaining at elevated levels, we expect a 25 bps hike in the repo rate followed by a prolonged pause," said Bhardwaj.
While the general expectation is building of another rate hike, its not completely a given. In the February MPC meeting, two of the six members voted in favour of a pause. If the MPC takes a more pessimistic view of the global developments in the past few weeks, more members may want to vote in favour of keeping the repo rate on hold. The central bank may chose to turn data-dependent in this policy itself, while keeping the doors open for further monetary policy tightening if needed in future. Goldman Sachs has assigned a subjective probability of 30 per cent for such a scenario.
