RBI Policy: Interest rate set to go up later this year, say experts

Some experts suspect that the repo rate will likely go up by the middle of the year

The Monetary Policy Committee (MPC) has kept policy rates unchanged yet again – for the 11^th time in a row. However, economists said that the MPC may gradually hike policy rates later this year to fight rising inflation.

“The RBI has maintained its accommodative stance, but its withdrawal in the next 3-4 months is inevitable. RBI has raised its inflation forecast and lowered its growth forecast, given the global uncertainty looming that will have a dual impact on growth and inflation in FY23,” said YS Chakravarti, MD & CEO, Shriram City Union Finance, a non-banking financial company (NBFC).

While many economists are of the view that this accommodative stance is the right approach to deal with the current economic situation, some say that it may have repercussions in the future.

“The stance remains accommodative but less accommodative than before. However, the effective rates have been hiked by 25-40 bps. The market still to settle down from the subtle changes of the complex policy has reacted negatively, with the 10-year yields jumping 10-12 bps and crossing the 7 percent mark,” added Sandeep Bagla, CEO, TRUST Mutual Fund.

Some suspect that the repo rate will likely go up by the middle of the year, especially considering the fact that the standing deposit facility (SDF) has been introduced this time.

“These are clear indications of the repo rate being increased during the course of the year, and we do expect at least 50 bps increase this year. Markets have already reacted with the 10-year bond going up past the 7 percent mark, and we expect the rate to go up to 7.25 percent this year,” said Madan Sabnavis, Chief Economist, Bank of Baroda.

Many have even termed the steps as a process of neutralising monetary policy that had already started with the withdrawal of ultra-comfortable liquidity. “In this policy, the operative rate was increased by 40bps with the institutionalisation of the Standing Deposit Facility. With this, RBI has almost buried the reverse repo as an instrument. Overall, we now expect the stance to be made 'NEUTRAL' in June and the first repo rate increase can come through in August,” said Indranil Pan, Chief Economist, YES Bank.