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Will RBI go for a hike in repo rate in coming months?

Much water had flown since the last monetary policy committee meeting in February, on the economic and business front, all thanks to the global geopolitical environment and the Russia-Ukraine war.

RBI guv to address in view of Fed’s possible rate hike
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RBI guv to address in view of Fed’s possible rate hike

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Much water had flown since the last monetary policy committee meeting in February, on the economic and business front, all thanks to the global geopolitical environment and the Russia-Ukraine war. India may not have direct linkages to this deteriorating geo-political situation, nevertheless it could not do away with negative impacts on commodity prices, global supply disruptions, overall volatile financial conditions. And these developments, as analysts rightly pointed out, had raised the upside risk on inflation and downside risks to growth. At this outset, Reserve Bank of India (RBI)'s latest monetary committee meeting kept the repo rate unchanged and stance accommodative. But does it signal at a gradual tightening in the months to come and restore the policy rate corridor under the liquidity adjustment facility (LAF) to the pre-pandemic position? Well, that remains to be seen.

The monetary policy committee, for sure, acknowledged in its latest policy prescription that inflationary pressures have increased since the Russia-Ukraine war started. The two countries are major producers of a range of energy, food, and metal commodities, so the disruption in trade linked to these has caused a broad-based increase in cost pressures. After one year of double-digit wholesale price index-linked (WPI) inflation, the MPC now believes input cost pressures could persist longer than earlier expected. The pass-through of cost pressures to consumer prices, while limited till now, needs to be monitored.

Mind you that significant upside is expected from elevated crude oil prices, which the MPC expects to average $100 per barrel this fiscal compared with $80 per barrel last year.

The impact of the pandemic is certainly on the wane and therefore, the monetary policy committee has every reason to believe that the economy is on the path of recovery. There are more reasons than one to believe this because contact-based services have begun showing increased contribution to growth and the RBI's surveys on consumer and business confidence also show an improvement. Having said all these, one will have to keep in mind that private consumption and investment remains subdued till date. At the end of the day, for all practical purposes, risks to economic recovery are now shifting from Covid-19 to geopolitical tensions. There is no doubt about that.

Upside risks to inflation show no signs of abating, with crude oil prices persisting above $100 per barrel, and food and metal prices at historic highs. Along with increasing cost pressures, analysts expect pressure on consumer prices to increase this fiscal.

Considering all these, it would not be a wrong notion to believe that maybe RBI is preparing markets for repo rate hikes and tighter monetary policy conditions in the months to come as external risks and inflationary pressures mount. RBI may raise repo rate by 50-75 basis points (bps) in fiscal 2023, beginning with the June monetary policy review. At least that is what is doing rounds in concerned quarters at this point in time.

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