Retail inflation in December 2022 declined to a one-year low of 5.72 per cent, which is under the RBI’s comfort zone
The RBI’s Monetary Policy Committee (MPC) meeting has started on Monday, February 6, and the repo rate decision will be announced on the last day of the three-day meeting on Wednesday, February 8. Though the retail inflation has come under the RBI’s limit of 6 per cent, analysts expect another 25 per cent hike in the repo rate on Wednesday. The central bank in 2022 raised the repo rate five times by 225 basis points in total to 6.25 per cent, to control inflation.
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India Ratings and Research expects the Reserve Bank of India (RBI) to hike the key policy rate by 25 basis points (bps) in the February 2023 monetary policy review. As inflation is trending down and global commodity prices have softened, the rating agency believes this could be the last rate hike in the ongoing rate hike cycle.
London-headquartered bank Barclays has also said the RBI MPC is expected to deliver another 25 basis points rate hike at the 6-8 February meeting, bringing the repo rate to 6.50 per cent.
“Headline inflation 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, in our view. This means the possibility of an on-hold decision is nonnegligible, but given elevated core CPI and recent comments by Governor Shaktikanta Das, we still believe a 25bp hike is the most likely step in February,” Barclays said.
According to a Reuters‘ poll also, the RBI is expected to raise its key repo rate by a modest 25 basis points to 6.50 per cent at its meeting.
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“Like many other major central banks, the RBI is expected to then pause, waiting for inflation to fall before considering a shift toward a stimulative stance as Asia’s third-largest economy slows,” according to a Reuters‘ report.
However, Aditi Nayar, chief economist at ICRA, said, “Taking into account (December’s) lower-than-expected CPI inflation print, and the muted average IIP growth of 1.3 per cent during October-November 2022, we anticipate that the MPC may choose to pause in February 2023.”
Retail inflation declined to a one-year low of 5.72 per cent in December 2022, mainly due to softening prices of food items. The Consumer Price Index (CPI)-based inflation rate eased to 5.72 per cent in December. It was 5.88 per cent in November, and 6.77 per cent in October 2022.
After remaining above the Reserve Bank of India’s upper tolerance threshold of 6 per cent since January 2022, retail inflation declined in November to 5.88 per cent and further in December to 5.72 per cent — its lowest level in one year.
In the last monetary policy review in December 2022, the RBI’s Monetary Policy Committee raised the repo rate by 35 basis points to 6.25 per cent. This was the fifth consecutive repo rate hike in 2022 alone. With that latest hike, the RBI’s rate-setting panel raised the key policy rate by 225 basis points in 2022 in total, in order to control inflation. The repo rate is the interest rate at which the RBI lends to the commercial bank.
