The Monetary Policy Committee is set to deliver a modest rate hike before it goes on a pause amid rising global headwinds, resilient domestic growth and easing headline inflation.
A Bloomberg poll of 40 economists shows a median forecast of 6.50%. Thirty-four economists expect a hike of 25 basis points and six expect a status quo. The policy repo rate is currently at 6.25%.
Headline inflation being 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, according to a research note by Rahul Bajoria, chief economist at Barclays.
“This means the possibility of an on-hold decision is non-negligible, but given elevated core CPI and recent comments by Governor Shaktikanta Das, we still believe a 25 basis points hike is the most likely step in February,” Bajoria, who also expects a change in stance to neutral, said.
Global rate hike cycles are close to peaking, though the central banks remain cautious, said Suvodeep Rakshit, senior economist at Kotak Institutional Equities.
“While the MPC’s decision is finely balanced between (a) pause and a 25 basis points hike, we expect the MPC to hike by a last 25 basis points to push the real rate comfortably into positive.”
Rakshit said this would help the Reserve Bank of India to be on a prolonged pause as it assesses the lagged impact of the past rate hikes and input price movements, evolution of the global and domestic demand conditions, and behaviour of global central banks.
Consumer Price Index inflation was at 5.72% in December, compared to 5.88% in November. However, core inflation rose to 6.3% in December as compared to 6.26% in November, according to Bloomberg.
The MPC will view the recent inflation prints favourably, Rakshit said.
The CPI inflation in the third quarter at 6.1% is around 50 basis points lower than the RBI’s estimate and inflation in the fourth quarter is also likely to be 20–30 basis points lower than the RBI’s estimate, he said.
Domestic growth remains on a decent footing for now while expectations of a global slowdown remain uncertain. The real repo rate will be positive by around 100 basis points at the current level, Rakshit said.
The RBI had taken measures to tighten liquidity amid the withdrawal of accommodation.
Transmission continues to improve as liquidity conditions tighten and the gap between deposit and credit growth remains large, Bajoria said.
Yet, they do not see room for the RBI to inject liquidity in the near term as it is likely to wait for transmission of its rate hikes into deposit rates, he said.
Liquidity conditions are likely to improve due to several factors, which would include moderation in currency in circulation in the post-festival period, pick up in government expenditure in the last few months of the financial year, and higher forex inflows due to the return of portfolio investors.
The benchmark 10-year G-Sec yield eased since the budget amid a lower-than-anticipated borrowing programme by the government.
“Despite slightly lower-than-expected borrowing, we believe bond supply and demand strains will re-emerge in the coming fiscal,” said Pranjul Bhandari, chief India economist at HSBC Securities and Capital Markets India Pvt., estimating benchmark yields at 7.50% by end-2023.
“With growth slowing, we expect no future rate hikes, although risks remain,” said Bhandari, who forecasts the MPC to hike rates by 25 basis points on Wednesday.
She expects no rate cuts in the next fiscal either as core inflation will likely remain elevated.
