The RBI has raised the key repo rate by 190 basis points in this fiscal year so far. The repo rate currently stands at 5.9%. The broad consensus amongst the economists and experts surveyed by TOI is that the repo rate will be hiked by another 35-60 basis points and settle in the 6.25-6.5% range.
According to the last policy statement, the MPC will remain focused on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth.
Bringing inflation below 6%:
Driven by food and fuel prices, CPI inflation has been above RBI’s upper comfort band of 6% for over 10 months now. Additionally, experts are of the view that given the globally high inflation and Russia-Ukraine war, India has been importing inflation. Having hit a peak of 7.79%, inflation is gradually cooling off and is expected to come below 6% in the first half of next calendar year.
According to DK Srivastava, Chief Policy Advisor at EY the RBI would continue to raise the repo rate until the CPI inflation falls below 6% and remains there in a sustained way. “This (inflation number) may largely depend on global crude price trends,” he tells TOI.
Both Dharmakirti Joshi, Chief Economist at CRISIL and Radhika Rao, Senior Economist, DBS Bank see the terminal rate at 6.5% by the end of this fiscal year.
Madan Sabnavis, Chief Economist at Bank of Baroda sees two rate hikes of 23-35 bps in the next two policy meets. “During this phase the inflation number will also come down statistically thus obviating the need for bigger rate hikes,” he says.
Nikhil Gupta, Chief Economist at Motilal Oswal Financial Services is not sure of the effectiveness of the monetary policy in tackling inflation. “With ~40% weightage of food and another ~10% of energy, it is widely debatable if monetary policy is the right tool to counter inflation in India,” he tells TOI.
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Experts are unsure about when the rate hike cycle is expected to end, since the MPC’s decisions are being driven not just by the CPI data but also in reaction to the US Federal Reserve.
The global factor at play:
Inflation in the US and UK has hit several decade highs this year. The US Fed raised its policy rate earlier this month to a range of 3.75%-4%. This was its fourth straight hike of 7 basis points to reduce inflation which is at more than three times the 2% target.
According to RBI governor Shaktikanta Das, the “extraordinary global circumstances” that caused the heightened inflationary pressures have impacted both advanced economies and emerging market economies. “India is, however, better placed than many of these economies. If high inflation is allowed to linger, it invariably triggers second order effects and unsettles expectations,” he said in his September policy statement.
Indranil Pan, Chief Economist at YES BANK sees RBI increasing the repo rate by 50 bps in December 2022 and further by 25-35bps in February 2023 and pause thereafter. However, he is of the view that much of the future trajectory will not only depend on domestic inflation but also have to be cognizant of the pace of rate increases in the US.
Agrees Vikas Vasal, National Managing Partner, Tax at Grant Thornton Bharat stating that action taken by other central banks will have a bearing. “A lot depends on the global developments, and domestic demand and supply situation. Actions taken by Regulators – Federal Reserve in USA, Bank of England, European Union etc., will also have a bearing on the RBI’s decision,” he tells TOI.
An economist at a leading housing finance company believes that RBI is raising rates not because of inflation, but to manage currency, that is to prevent further rupee depreciation. “Rate hike cycle largely depends on how the US Federal Reserve continues with the rate hike. But RBI will not be as aggressive as the Fed in terms of rate hike,” the economist adds.
Srivastava of EY also opines RBI will raise rates in line with the US, but it may under correct the difference between the Fed rate and the repo rate in each round and with a delay.
Ranen Banerjee, Partner and Leader Economic Advisory Services at PwC expects the rate hike cycles to pause by March 2023.
Dr. Rupa Rege Nitsure, Group Chief Economist at L&T Financial Services told TOI, “The pace of rate hikes & the level of terminal policy rate will be data-driven and cannot be ascertained at this juncture.”
Nikhil Gupta of Motilal Oswal Financial is sure that with sharp hikes in global interest rates, it is highly unlikely that the RBI will be able to sit quiet. “The terminal rate could be as high as 6.75% by March 2023,” he says.
While the Indian economic growth is said to be largely domestic demand driven, the high inflation and recession scenario in most global economies requires timely policy interventions from the RBI and the government. As Shaktikanta Das said in the September statement, “…the monetary policy has to carry forward its calibrated action on policy rates and liquidity conditions consistent with the evolving inflation growth dynamics. It must remain alert and nimble.”