RBI Monetary Policy: Where Will Rates Peak? Economists Weigh In

The MPC will continue to hike rates though the quantum could ease, according to economists.

<div class="paragraphs"><p>The RBI building. (Source: BQ Prime)</p></div>
The RBI building. (Source: BQ Prime)

India's Monetary Policy Committee hiked the benchmark repo rate by 50 basis points to 5.4%—its third straight increase—as its continues efforts to quell inflation in the economy. Further rate hikes seem imminent, economists said, though the quantum could ease.

More Rate Hikes Warranted

The central bank continues to remain worried about inflation as it remains uncomfortably high still, Pranjul Bhandari, chief India economist at HSBC, said.

"The RBI unveiled its April-June 2023 inflation forecast at 5%. Earlier it has spoken about real neutral rates at 1%. Combining the two, we think the repo rate can be raised to 6%. We expect rate hikes in the two remaining meetings of the year, taking the repo rate to 6% in December this year," Bhandari said in a note.

According to Rahul Bajoria, chief India economist at Barclays, significant focus on the external position means the RBI continues to hold a cautious view of the policy direction.

Over the next two meetings—September and December, we expect the RBI to maintain inflation management as its key priority, until inflation returns to the target range, Bajoria said. "We now expect the RBI to deliver a 25 basis points rate hike at the September policy review and shift to a neutral policy stance. Beyond that, we expect the RBI to deliver one more 25 basis points rate hike in December, taking the repo rate to 5.90%."

"But if global commodity prices continue to decline, we note the risk that the bank does not raise rates in December," Bajoria said. "Given the moderation in inflation by December, the RBI will also have brought its ex-ante real rate to its target level, leaving little scope for further rate increases."

Abheek Barua, chief economist at HDFC, expects the RBI to continue with its rate hikes in the upcoming policies, taking rates up to 5.75% by the end of the year.

Moderate Rate Hikes Ahead

"While we await the inflation print for Q2 FY23, rate hikes will be moderate and there can even be a pause if the CPI data throws up figures nearer to 6% over the next two-three months," Suman Chowdhury, chief analytical officer at Acuité Ratings & Research, said. "For now, however, one can expect further deposit and lending rate hikes by banks, given the improved credit demand in the economy."

What is noteworthy is that the central bank has not revised its existing growth or inflation forecasts despite indications of a global slowdown, recessionary conditions in the developed economies, and the moderation already witnessed in commodity prices, Chowdhury said.

Possibly, it would like to go through more data points over the next two months before reviewing these forecasts, he said. At this point, the central bank believes that India’s growth in the current year would be largely resilient with the mitigation of risks of a monsoon failure and a healthy pickup in rural demand, Chowdhury said.

Aurodeep Nandi, India economist and vice president at Nomura, said, "With the RBI retaining the policy stance of 'withdrawal of accommodation', the implicit message is that rates are yet to reach neutral territory, and that more rate hikes are warranted—a view that we agree with."

The RBI continues to signal that all options are on the table, which is a prudent strategy given the elevated levels of uncertainties on growth as well as inflation, he said.

Actions Will Be Guided By Incoming Data

The MPC is expected to raise the repo rate by another 25 basis points during its September review meeting, according to Dharmakirti Joshi, chief economist at Crisil. Beyond that, actions will be guided by incoming data, he said.

Despite challenging environment, the RBI sees domestic economic recovery improving and getting broad-based as it kept GDP growth forecast unchanged at 7.2% for this fiscal, Joshi said. Friday’s rate hike, although aimed at inflation, also partly addresses spillover risks from an aggressive stance of the U.S. Federal Reserve and other systemically important central banks, he said.

While the delivery mechanism of the next leg of interest rate normalisation could remain front-loaded in line with most other central banks, chances of taking a data-driven calibrated approach appear equally likely in the backdrop of escalation in global slowdown risks, economists at QuantEco Research said.

QuantEco research expects the MPC to take repo rate to 5.9% by December this year. This would involve 50 basis points of incremental rate hike before the members decide to pause and assess the impact of pass-through of global risks and domestic policy tightening, said a note by QuantEco research, published on Friday.