Since retail inflation has remained above RBI’s target range of 2-6%, the MPC is expected to hike the interest rate by another 25 bps and take the repo rate to 6.75%.
The Reserve Bank of India monetary policy committee (MPC) is set to announce the current financial year’s first bi-monthly monetary policy on Thursday, 6 April, concluding a 3-day meeting. Since retail inflation has remained above RBI’s target range of 2-6%, the MPC is expected to hike the interest rate by another 25 bps and take the repo rate to 6.75%. Economists and analysts expect the policy tone to be balanced and current global headwinds may prompt RBI to be cautious and continue with the rate hikes.
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US Fed continuing rate hike cycle may support RBI’s decision
“Even after the recent bank episodes (SVB etc) the European Central Bank, US Fed, Bank of England and Swiss National Bank have increased the policy rates in their jurisdiction. Domestic CPI inflation has remained elevated above 6% for the last 2 months. Additionally, the upside risks to food inflation exist due to unseasonal rains and in case there is El Nino led disruptions. Therefore, at this juncture, it becomes important for RBI to reinforce its commitment towards taming inflation. The expectation of the Federal Reserve continuing its rate hike cycle to control inflation may support the RBI’s decision to raise the repo rate in the April meeting before pressing the pause button,” said Mandar Pitale, Head- Treasury, SBM Bank India.
RBI may hike interest rate by 25 bps and then take a pause
“RBI has already raised repo rates by 250 bps. There is no overheating in the economy despite resilient growth. RBI may decide to take a 25 bps hike in policy rates in the upcoming policy meeting and then take a pause. Over the next few months’ time, we believe there will be more clarity of direction of the US Fed and impact of already done rate hikes on inflation and growth,” said Srikanth Subramanian, CEO at Kotak Cherry.
RBI MPC policy tone expected to be balanced
“The MPC is likely to deliver a 25 bps hike, and the policy tone is expected to be balanced, albeit non-committal, with its move to keeping a ‘neutral’ stance. The MPC will be deriving comfort from the: 1) recent de facto less (perceived) Fed tightening/easing, 2) monetary-policy lags of past hikes, 3) improving external sector dynamics, and 4) system liquidity being back in deficit and call rate hugging repo rate. However, policymakers would still justify the hike – stating recent inflation surprises, the stickiness of core and the still-elusive 4% medium-term target – in a bid to maintain their inflation-fighting credibility, especially as they continue to view growth impulses as stable. We see FY24E average headline/core inflation at 5.2%/ 5.0%, respectively,” said analysts at Emkay Global.
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Unseasonal rains damaging the crops may lead to rate hike
“The RBI is expected to go in for one more round of repo rate increase of 25 basis points in the forthcoming monetary policy review meeting. The current macroeconomic uncertainties in the country and sticky inflation, coupled with global tightening and control are expected to prompt RBI to be cautious and continue with the rate increase. The supply side issues likely to be created due to unseasonal rains damaging the crops are another pressing factor for the additional inflation control requirement. The central banks, world over are watching the situation with anxiety, following the failure of some leading Banks in the US and Europe and the RBI may not be in a position to take a pause as regards the repo rate increase at this stage. Although the GST collection and exports are indicating a positive sign, the growth inflation trade-off is still tilted in favour of more pressing and immediate inflation control,” said Jyoti Prakash Gadia, Managing Director, Resurgent India.
