RBI monetary policy committee may raise repo rate by 25 bps in February before putting a pause on the rate hike cycle.
RBI MPC is expected to deliver another repo rate hike in February even as retail inflation cooled off in December to remain within RBI’s tolerance limit of 6% for two straight months. The monetary policy committee may raise the repo rate by 25 bps next month before putting a pause in the cycle. Analysts see the terminal repo rate at 6.5%. “The extent of global disruption and disinflation will remain key to the RBI’s reaction function ahead,” said Emkay Global Financial Services in a note.
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RBI MPC to hike repo rate to 6.5% in February
Analysts at Barclays believe that RBI is unlikely to feel very comfortable with the CPI inflation data for December, given demand-driven price pressures remain elevated. “We expect the central bank to maintain a broadly hawkish policy stance going into the February monetary policy meeting and deliver a 25bp hike, taking the Repo rate to 6.50%,” they said. The brokerage firm believes that the concurrent real repo rate is fairly positive.
However, it still provides space for another shallow hike of up to 25 bps in next RBI MPC meet, to reach a neutral rate (albeit, not necessarily implying an end of the cycle). “We still think that the RBI would not turn too restrictive. But we reckon the situation is fluid and the extent of global disruption and disinflation will remain key to the RBI’s reaction function ahead,” it said.
Will Fed follow RBI MPC by slowing rate hike pace?
According to Vivek Goel, Co-founder and Joint Managing Director, TailWind, even though headline inflation has come off, core inflation continues to remain sticky, and it will be an important input for the future course of monetary policy. “With the Fed’s policy announcement due soon, it also has to be seen whether they echo a similar reduction in rate hike as done by RBI and help support markets amidst global growth concerns,” Goel said.
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A pause in interest rate hike may be on cards
According to Anitha Rangan, Economist, Equirus Capital, core inflation could remain stubborn over the next year. However, as long as RBI sticks to headline inflation, the case for a rate hike pause becomes stronger. “The recent reference to core inflation may test this thesis, however, fiscal pressures with a high gross borrowing and growth support may warrant a pause. If the Fed is going to hike 25 bps, RBI might rather pause and give its domestic growth a chance,” Rangan said.
RBI MPC to pause rate hike after February meet
As CPI inflation eases further in December and IIP comes in at a higher single digit for November, it is a double delight, according to Nish Bhatt, Founder & CEO, Millwood Kane International. “This set of economic data will certainly help as we approach the Union Budget and the RBI policy next month. Overall it looks like the central bank will be comfortable pausing after a slight hike in February given the current situation,” he said.
