Final rate hike in upcoming monetary policy? RBI may raise repo rate by 25 bps

Since May last year, RBI has hiked the repo rate six times in a row — taking the total hike to 250 bps. The repo rate has shifted from 4% to a four-year high of 6.50%. Inflationary pressure is the real spoilsport to why RBI had to take the path of a rate hike cycle from last fiscal, in line with other global central banks.

In the previous policy which was announced on February 8th, RBI hiked the repo rate by 25 bps. Before that, RBI hiked the rate by 35 bps in December 2022 policy.

RBI continues to raise concern over inflation, especially sticky core inflation. India’s CPI inflation eased slightly at 6.44% in February 2023, however, was higher than expected. Also, this inflation reading would be the second consecutive month where it has stayed above RBI’s upper tolerance limit of 6% after easing temporarily between November and December last year.

In March 2022 bulletin, RBI said, “consumer price inflation remains high and core inflation continues to defy the distinct softening of input costs.”

Srikanth Subramanian, CEO at Kotak Cherry said, “It’s been a very busy FY23 for global central banks. On one hand, they had to take an aggressive monetary policy stance by hiking interest rates and withdrawing liquidity from the system, and on the other hand, they had to take steps to protect the banking sector from fears of contagion risk spreading across the financial system. For India, there seems to be a very limited risk of the banking crisis situation considering the stringent regulations around liquidity coverage ratios and capital adequacy requirements.”

Subramanian added that MPC will be taking note of all the evolving stories when they meet in April 2023. RBI has already raised repo rates by 250bps. There is no overheating in the economy despite resilient growth. RBI may decide to take a 25bps hike in policy rates in the upcoming policy meeting and then take a pause.

“Over the next few months’ time, we believe there will be more clarity of direction of US Fed, and impact of already done rate hikes on inflation and growth,” he added.

Along similar lines, Upasna Bhardwaj, Chief Economist, Kotak Mahindra Bank also believes that the April 2023 policy will record a final rate hike.

Kotak Bank’s chief economist added, “expect MPC to deliver its final rate hike. The recent global developments will be weighing heavily during the policy decision-making by the MPC. With domestic inflation also remaining at elevated levels we expect a 25 bps hike in the Repo rate followed by a prolonged pause.”

Further, Yes Bank’s economists in their report said, “even though there remains significant uncertainty with respect to the future rate hike trajectory, in our view possibility of another 25-bps rate hike exists assuming no further escalation of banking sector woes in the US or elsewhere. While we do not factor in any rate cuts yet for 2023, this will largely depend on the lagged implication of the past rate increases (and from banking sector stress) on inflation, labour markets and growth.”

The six-member monetary policy committee will begin their 3-days meeting from April 3rd. The final outcome on policy rates and outlook will be announced on April 6th.

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