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Fed may hike rate again but RBI will pause after a 25 bps April hike, say economists

The US Federal Reserve, on March 22, hiked key interest rates by 25 bps, taking it between 4.75 percent and 5 percent. Experts believe the Reserve Bank of India is likely to hike the repo rate by 25 bps in April.

March 23, 2023 / 02:15 PM IST

The US Federal Reserve will possibly hike interest rates again in May but the Reserve Bank of India (RBI) will take a pause after a possible 25 basis points (bps) hike in April, economists said.

The March 22 rate hike by the Fed, which was expected to be 50 bps, was lowered to 25 bps due to the ongoing banking sector crisis in the US. Experts said the Fed may hike rates again in May by 25 bps if the market situation stabilises with no larger damage to the banking system.

One basis point is one-hundredth of a percentage point.

“On the US banking system, Fed Chair Jerome Powell reiterated that the system is strong, but the recent failure of regional banks could cause ripple effects in the economy. We expect a 25 bps hike in May by the Fed if indeed the current market turmoil stabilises with no major system-wide contagion risks emerging,” said Sakshi Gupta, Principal Economist, HDFC Bank.

In India, economists said that the RBI’s monetary policy meeting (MPC) in April is expected to hike the repo rate by 25 bps. Repo rate is the rate at which RBI lends money to banks.

Gaura Sen Gupta, India Economist, IDFC Bank, said that the Fed’s hike was in line with expectations, and with this, the RBI would also work on a similar hike.

“The Fed policy was expected, with the focus on containing inflation. Against this backdrop, we continue to expect the RBI to hike policy rates by 25 bps in April,” Sen Gupta said.

Also read: Fed and RBI on the same page, more rate hikes likely

Similarly, Anubhuti Sahay, Head of South Asia Economic Research, Standard Chartered Bank, said: “The recent developments in the banking sector are likely to keep most central banks cautious in their approach towards aggressive hiking. Hence, we expect the MPC to hike rates by 25 bps in April.”

The RBI has hiked the repo rate by 250 bps since May 2022 to fight price rise.

Fed’s rate hike

The Fed’s action of hiking key interest rates by 25 bps came days after Silicon Valley Bank (SVB) and at least two other regional banks failed, following the mounting losses on their bond portfolio and withdrawals from depositors. The large-scale fund withdrawals from depositors cracked their balance sheets, forcing the regulators to shut down these entities.

The banking crisis kicked off a major sell-off across stock markets and somewhat triggered the downfall of global banking major Credit Suisse, which was merged with UBS in a Swiss-government brokered deal.

Also read: US Fed raises rates by quarter point to fight inflation despite banking sector crisis

Gupta highlighted that the inflation situation in the US warranted further monetary tightening and the Fed has responded accordingly.

“However the regional banking crisis remains on the Fed’s radar and is unlikely to influence monetary policy, going forward, if the situation escalates. The Fed clearly signalled that its commitment remains towards controlling inflation and does not see the current turmoil becoming a systemic risk,” Gupta said.

What’s in store for RBI?

Experts suggested that after the hike in April, RBI would be looking for a pause.

Sahay highlighted that a dovish hike and a prolonged pause after the April hike is expected as inflation in India is expected to come off to 5 percent average for fiscal year 2024 from 6.6 percent in the previous year.

Sen Gupta said: "On the RBI policy, we continue to expect one more 25 bps hike in April. After April, we expect the RBI to remain on a pause till the end of 2023.”

Jinit Parmar
Jinit Parmar is a correspondent based out of Mumbai covering banks, banking trends and more, tweets @jinitparmar10 #banks #bankingtrends #RBI