The monetary policy committee (MPC) of the Reserve Bank of India (RBI) is likely to increase the repo rate by 25 basis points (bps) in the April monetary policy meeting to fight higher inflation, economists said.
This stands in contrast to the SBI Research report on the MPC meeting that predicted status quo on the policy rate.
The MPC is scheduled to meet on April 3-6.
“With core inflation still above 6 percent and food inflation again raising its ugly head, the RBI may hike the repo rate one more time by 25 bps, before hitting the pause button in this cycle,” said Rajani Sinha, chief economist, CareEdge.
ICRA in a report added that the anticipated April 2023 rate hike would take the repo rate to 6.75 percent, which is more than 100 bps higher than the MPC’s CPI inflation forecast for H2FY2024 and may be adequate given that the GDP expansion is at best likely to be similar. to potential GDP growth in that period.
The RBI has increased the repo rate by 250 bps since May last year to fight rising inflation.
Pause after April
Some economists expect the central bank to pause in the upcoming policy and remain more data-dependent for further assessment. ICRA said that after the hike in April, there should be an extended hiatus through the remainder of FY24 to assess the transmission of policy tightening.
“It could turn more data-dependent, keeping one eye firmly on domestic growth-inflation dynamics and another on any signs of contagion from a potential stress in the US banking system. In case of the latter, the RBI in our view will be nimble and proactive, if the need arises,” a QuantEco Research report said.
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The SBI Research stance
The SBI Research report said that the RBI is unlikely to hike the repo rate in the upcoming MPC meet. In its assessment report, the SBI said the repo rate is already around 25 bps higher than the optimal requirement, and that a 6.5 percent repo rate could be considered as terminal rate.
The report arrived at the optimal repo rate considering three factors—that the RBI has projected inflation to remain in the range of 5.2 percent to 5.5 percent in FY 24; sticky core inflation anticipated to remain in the range of 5.4 percent to 5.6 percent in FY24; and the Fed future implied terminal rate expected to remain in the range of 4.85-4.95 percent in calendar year 2023.
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The CPI or Consumer Price Index inflation for February came in at 6.44 percent, a mild softening after the surprise jump in January to 6.52 percent. With this, retail inflation has now been above the RBI’s medium-term target of 4 percent for 41 months in a row.