RBI MPC | Monetary policy decision today: What to expect?

The Reserve Bank of India (RBI) is likely to increase key rates, focusing more on inflation than on growth, according to several economists. Further tightening measures will be rolled out, they said. To firm up the next monetary policy announcement, the RBI’s rate-setting panel started its three-day deliberations on Monday and the policy decision will be out today.

Here are five aspects that are likely to be considered in the policy meeting:

1. Rate hikes: Several economists said that the key rate would be hiked in the upcoming policy meet. While some expect it to range between 35 basis points (bps) to 50 bps, others see it in the 40-50 bps range. “We expect CPI inflation (to) average around 7.2-7.3 percent in H1 FY23  on account of elevated commodity prices, high food and core inflation,” said Swati Arora, Economist, HDFC Bank. According to economists, while controlling inflation is a priority now, RBI is also cautious in striking a balance between demand recovery and inflation control. “There will definitely be a rate repo hike. It could either be 40 bps or 50 bps,” added Sarbartho Mukherjee, Economist, Mahindra Group.ALSO READ:India must resist an aggressive and deep rate hike cycle
2. Revised inflation target: The Inflationary Expectations Survey by the RBI reveals that 89.9 percent respondents in March 2022 believed that prices will increase, going forward, higher than the January 2022 estimate (85.6 percent). With CPI and WPI, both setting new highs last month, it is expected that the RBI will revise its inflation target to a more realistic number, i.e, beyond 6 percent for CPI as the ongoing Ukraine-Russia war impacts input costs, according to economists.
3. Slight rise in CRR: Although, it might not be a major agenda for this meet, but there is likely to be a slight rise in the cash reserve ratio (CRR) in the monetary policy, according to economists. “A gradual increase of CRR by 25 bps in the next policy meet can’t be ruled out, depending on the situation, going forward. The liquidity adjustment facility (LAF) corridor has been normalised. So, we don’t expect much change in this context,” stated Sankhanath Bandyopadhyay, Economist, Infomerics Ratings.
4. Sacrificing growth for now: Growth won’t be the priority for the monetary policy for now, said economists. “Both RBI and the government are now prioritising inflation control and seem willing to sacrifice some growth, for example, in base metals and wheat exports, to achieve modest inflation,” said Prithviraj Srinivas, Chief Economist at Axis Capital. “On the growth front, the RBI is likely to keep the GDP forecast unchanged at 7.2 percent,” added Arora.

5. No limit rise in gilt yields: Economists pointed out that the RBI will not announce any step to limit the rise in gilt yields. “The RBI governor will likely use verbal assurances that the deficit will not be breached to limit the rise in gilt yields,” added Srinivasan.