RBI raises rates by 50 bps; another 35-bps hike looks imminent

RBI Governor Shaktikanta Das

The Reserve Bank of India (RBI) and the Monetary Policy Committee (MPC) delivered a boringly predictable 50 basis points (bps) hike. That a 50-bps hike raised no hackles, and was actually greeted by a 2 percent rally in stocks indicates the extent to which the market has been psyched by the US Fed’s hikes and hawkishness and the consequent nearly 3 percent fall in the rupee.

But what next? The RBI governor absolutely refused to be drawn into any guidance on what’s the peak rate. "In a policy tightening cycle, it is arduous to provide consistent forward guidance, particularly in a highly uncertain environment. In fact, forward guidance may even destabilise financial markets,” the governor argued. “Our actions will be carefully calibrated to the incoming data and evolving scenario without being constrained by conventional or any textbook approach to policy-making.” That was the governor’s way of saying the MPC will be data dependent.

However, his defence of the stance “withdrawal of accommodation” gives the impression that the RBI definitely has more rate hikes in mind. The governor compared the current monetary conditions to June 2019, when RBI went from neutral to accommodative. He pointed out that at that time Consumer Price Index (CPI) was 2 percent lower than the repo rate and liquidity was in deficit. Now CPI is higher than the RBI target and liquidity is still in surplus. The subtext of this argument is that policy is accommodative, and hence ipso facto there are more hikes ahead.

So, how many hikes? A minimum 35-bps hike in December seems a given since the RBI would have just written to the parliament explaining its failure to hold CPI below 6 percent. Also, CPI readings for September and October are seen above 7 percent, and hence, it will be morally untenable for the MPC not to hike more than the standard 25 bps.

At a repo rate of 6.25 percent, the MPC will have to take a call in February looking at the data. CPI data until December will be available and that should be well below 7 percent. But the governor’s reference to the June 2019 MPC stance indicates he is acutely looking at positive real rates. Also, by then the Fed would have delivered another 125-bps of hikes, and that may mount pressure on the rupee. The February budget could be more fiscally stimulative, since it would be the last budget of the BJP’s current term. All told it looks more likely than not that another 25 bps hike will be needed. The risk to this hike is if a US-cum-European recession sharply brings down crude prices. Geopolitics also remains the joker in the pack.