High inflation, which is now beyond the RBI’s upper target limit of 6 per cent, warrants continued front loading of rate hikes, say experts
RBI MPC Meeting Next Week: After easing for three months in a row, the retail inflation in India picked up again in August to 7 per cent. This has affected the analysts’ expectations regarding the monetary policy decision next week. Experts said the country’s high inflation, which now stands at 7 per cent and beyond the RBI’s upper target limit of 6 per cent, warrants continued front loading of rate hikes. Though they differ on the quantum between 25 basis points and 50 basis points, all of them expect a repo rate hike next week with most predicting a 50-bp increase.
The six-member Monetary Policy Committee is scheduled to meet during September 28-30. RBI Governor Shaktikanta Das will announce the MPC decision on September 30, the last date of the meeting. In the past three policy reviews, the RBI’s rate-setting panel has raised 140 basis points in total since May this year. Currently, the repo rate, the interest rate at which the RBI lends to the commercial bank, stands at 5.40 per cent.
Vivek Iyer, partner and leader (financial services risk) at Grant Thornton Bharat, said, “We expect a 35-50 basis point hike from the MPC given that the inflation is still a concern due to supply-side issues and evolving geopolitical scenarios around the Russian-Ukranian conflict and the Sino-American tussle.”
Foreign brokerage Morgan Stanley in its report has also said it was earlier expecting a 35-bps increase but sticky inflation and continued hawkish stance of central banks warrants continued front loading of rate hikes. “Market pricing is expecting a repo rate hike of a similar magnitude, 50 bps.”
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In the last monetary policy in August, the RBI MPC raised the repo rate by 50 basis points to 5.40 per cent. Amid the tight monetary policy regime, the banks have been raising interest rates on both loans and deposits. A further rate hike will also prompt them to raise interest rates further.
Sunil Kumar Sinha, principal economist at India Ratings and Research, said, “August 2022 is 35th consecutive month in which retail inflation has been higher than the RBI’s inflation target of 4 per cent (plus/minus 2 per cent). This is the second instance since the RBI adopted inflation targeting approach that the retail inflation has breached the upper tolerance limit of 6 per cent for eight consecutive months — January 2022 to August 2022. The earlier instance was from April 2020 to November 2020.”
He said Ind-Ra believes that in line with the major central banks across the world, the RBI will continue to follow a tighter monetary policy regime and another 25-50-bp hike in policy rates is expected in FY23.
Experts also said the RBI will continue to maintain the balancing act between growth and inflation. In the June 2022 quarter, India’s gross GDP rose 13.5 per cent as compared with the 20.1 per cent growth registered in Q1 2021-22. During April-June 2022, the country’s gross value added (GVA), which is GDP minus net product taxes and reflects growth in supply, grew 12.7 per cent.
Rajnish Girdhar, chief executive officer of Karma Capital Advisors, said, “The RBI will continue to maintain the balancing act between growth and inflation. We expect the continuation of the previous RBI stance with a 50-bp hike. The domestic growth drivers continue to be intact while the inflation continues to remain sticky for a while.”
Expressing similar view, Ricky Kirpalani, lead sponsor of First Water Capital Fund, also said that given the complexity of all the macro headwinds, the approach is likely to be moderate to ensure that growth is also maintained.
Suvodeep Rakshit, senior economist at Kotak Institutional Equities, said “Inflation prints over the coming months are expected to remain elevated albeit moderating gradually to below MPC’s upper threshold of 6 per cent in 4QFY23. With the MPC expected to continue with rate hikes, the lagged impact of monetary tightening will help curb inflation expectations.”
Rakshit added that the MPC is expected to continue with calibrated repo rate hikes towards 6 per cent by end-CY2022 with a 35-bp hike in the September 2022 policy along with the shift in the operating target from SDF to repo rate by end-FY2023.
Atul Monga, CEO and co-founder of BASIC Home Loan, said that given the existing geopolitical trends and volatility in global financial markets, there is a probability that RBI may still raise the repo and reverse repo rates by 25 basis points.
