Analysts Expect Another 25 Basis Points Hike In April Policy

The increase in Fed rates has made the monetary policymaking for emerging economy central banks now a difficult proposition.

<div class="paragraphs"><p>The Reserve Bank of India seal is pictured on a gate outside the RBI headquarters in Mumbai. (Photo: Danish Siddiqui/Reuters)</p></div>
The Reserve Bank of India seal is pictured on a gate outside the RBI headquarters in Mumbai. (Photo: Danish Siddiqui/Reuters)

Analysts are of the view that after delivering the seventh hawkish policy on Wednesday, the central bank may pause after delivering a likely 25 basis points increase in the April review.

For Abheek Barua, the chief economist at HDFC Bank, the 25 basis points repo hike and keeping its withdrawal of accommodation stance unchanged are on expected lines, the policy tone was hawkish as the RBI-MPC has recognised that they are still away from achieving their objective of durable disinflation, which still looks distant as the core inflation continues to remain sticky.

“Even as headline inflation is likely to moderate over the coming months, core inflation could remain sticky, and if the RBI chooses to continue seeing signs of durable moderation in core inflation as a yardstick for policy tightening, another 25 basis point rate hike in April is likely. But we see a change in stance to neutral is unlikely until the RBI pauses its rate hike cycle,” Barua said.

He said that the more-than-expected hawkish stance was clear from how the market reacted—the 10-year bond yield rose to 7.34% post-policy from the last closing level of 7.31%. He expects the 10-year paper to trade 7.30-7.35% in the near term and the rupee to trade 82-83 levels in the near term as global risks continue to remain elevated.

Suman Chowdhury, chief analytical officer of Acuité Ratings, also feels that since the RBI has continued its stance of withdrawal of accommodation and has maintained a hawkish tone, there is no indication of any pause in the rate hike and the likelihood of further moderate hikes in the repo rate remains, depending on the upcoming data prints.

However, Crisil said that improved inflation outlook leads to slower pace of rate increase going forward, and pointed to the smaller quantum of rate hike as a nod to moderating inflation and improved inflation outlook, while recognising the risks arising from core inflation.

"We expect this to be a terminal hike in the current cycle, and the MPC to pause thereafter to assess the impact of rate hikes so far. Sticky core inflation could mean that the repo rate could remain at 6.5% for longer," Crisil economists said in a note.

Sunil Sinha, the principal economist at India Ratings, also believes that from hereon, RBI may not raise the policy rate but will also not think of reducing it any time soon. This means the policy rate will remain at the current level, at least in the foreseeable future, unless there is any adverse shock to the economy and the real rate of interest will remain positive.

State Bank chief economist Soumya Kanti Ghosh has a completely different take on the policy, saying it is high time that the RBI exited from chakravyuh of the Fed because monetary policy needs to be country-specific, else it could be a self-fulfilling prophecy of rate hikes chasing rate hikes.

The continuous increase in Fed rates has made the monetary policy-making for emerging economy central banks now a difficult proposition. With the U.S. job market continuing to be significantly resilient, even with the latest data, it now looks likely that the Fed will continue to hike even beyond March.

"Against this background, there is an active debate on the timing and sequencing of monetary stance around the world. Therefore, the April policy assumes special importance of whether we can signal an exit from coordinated monetary policy increases as otherwise, it may become a self-fulfilling prophecy of central banks of emerging markets doing a continuous catch up with the Fed,” he said.

Because according to him, between April 2022 and February 2023, the spread between Fed rates and our repo rate has now declined to 192 basis points. Interestingly, the spread is now constant at 192 basis points since December 2022.