Moderate repo hike likely this time
3-day RBI MPC meeting begins today, will announce bi-monthly policy review on Dec 7; Since May, RBI hiked 190bps in 3 cycles to calm down inflation, which remained above its comfort level of 6% since Jan; US Federal Reserve increased interest rate in 4 tranches by 75bps each
New Delhi: After three back-to-back 50 basis points hike in interest rates, the Reserve Bank of India (RBI) may opt for a lower rate increase of 25-35 bps in lending rates at its coming monetary policy review on Wednesday amid retail inflation showing signs of moderation and the need to push growth, according to experts.
The RBI will come out with its next bi-monthly policy review on December 7 at the end of the three-day meeting of the Monetary Policy Committee (MPC) beginning Monday. In addition to the domestic factors, the RBI committee may also take some cues from the US Federal Reserve which hinted at a lower rate hike of 50 basis later in the month.
In order to combat inflation, the Federal Reserve had earlier hiked the key interest rates four times by 75 basis points (bps) each. The Reserve Bank since May has increased the repo or benchmark lending rates by 190 basis points, to calm down inflation which has remained above its comfort level of 6 per cent since January.
Madan Sabnavis, chief economist at Bank of Baroda, said: "The RBI will be presenting the monetary policy against the backdrop of GDP growth slowing down as well as inflation being high above 6 per cent. We do believe that the MPC will continue with rate hikes this time though the magnitude will be lower -- probably 25-35 bps. More specifically we do believe that the terminal repo rate for the financial year will be 6.5 per cent, which means there will be one more rate hike in February."
Sabnavis further said there will not be any surprise for the market just as is the case for global markets too, which are now expecting more moderate increases in interest rates by the Fed. The GDP growth in the second quarter of the fiscal slowed to 6.3 per cent as against a growth of 13.5 per cent in the preceding three months. Consumer price index (CPI) based retail inflation, which the RBI mainly factors in while arriving at its monetary policy, is showing signs of moderation, but still remains above the central bank's upper tolerance level.
DK Pant, Chief Economist, India Ratings & Research, said: "The second quarter inflation and GDP numbers are in line with RBI's forecast. Inflation is likely to decline further. However, it is expected to remain higher than 6 per cent in this quarter. We believe RBI may go for a 25 bps hike in repo rate in December 2022 monetary policy."
Shanti Ekambaram, whole-time director, Kotak Mahindra Bank, adds: "the RBI has been keeping a close tab on growth and inflationary trends, and future action will be based on data prints on both growth and inflation. We expect a lower rate hike -- 25 to 35 bps -- from the RBI and MPC given the last lower inflation reading and a slight softening in Fed speak. As on expected lines, inflationary trends would start showing a decline in the fourth quarter of the current fiscal."
