With retail inflation showing signs of declining and the US Fed holding back on the pace of its benchmark interest rate hike, the Reserve Bank is likely to settle for a smaller 25 basis point repo rate hike in its upcoming two-month monetary policy due date. later this week. .
In its December Monetary Policy Review, the central bank raised its key benchmark interest rate (REPO) by 35 basis points (bps) after three successive increases of 50 bps.
The Reserve Bank has raised its short-term lending rate by 225 basis points since May last year to contain inflation driven largely by external factors, especially the disruption to the global supply chain following the start of the war between Russia and Ukraine.
RBI’s rate-setting group, the Monetary Policy Committee (MPC), will begin its three-day deliberations on the next monetary policy package on Monday. The decision will be announced on February 8.
The Kotak Institutional Equities report says that the global inflationary environment is gradually becoming favorable, although inflation is still well above the targets of all central banks. Inflation is likely to slow further in the next few months, leading to the completion of the rate hike cycle by the first half of 2023 and a possible rate cut in late 2023/early 2024.
“However, given the large global uncertainty, the leverage of central banks to support growth through monetary easing remains limited, which could lead to higher rates over an extended period.
“We expect the RBI MPC to raise its key rate by 25 basis points to 6.5%, followed by a long wait-and-see approach as it assesses the lag impact of monetary tightening on growth and inflation,” the statement said.
The RBI has been tasked with ensuring that retail inflation remains at 4 percent with a margin of 2 percent. However, it failed to keep the inflation rate below six percent for three consecutive quarters starting in January 2022.
However, consumer price index (CPI)-based retail inflation showed signs of slowing in November and December as it fell below the RBI’s 6% ceiling.
Regarding his expectations for MPC, Druv Agarwala, Group CEO, Housing.com, said that amid slower-than-predicted growth forecasts for 2023-24, RBI is likely to stick to a modest increase in its base lending rate in an upcoming political announcement. before hitting the pause button on hikes later in 2023.
“The move is likely to have a limited impact on real estate demand as home buying decisions are driven by several factors beyond home loan rates. However, borrowers will feel the downside of this rate hike as home loan EMI for existing and new loans rises,” he said.
Amita Vaidya, director of the Sarla Anil Modi School of Economics, NMIMS in Mumbai, also said the monetary policy committee could ease its stance on monetary tightening.
“However, the negative outlook for the global economy remains. The domestic economy is showing growth and stability. Food inflation continues to be under pressure from high grain prices. So the RBI can still focus on the loan withdrawal and raise the discount rate by 25 basis points,” she said.
On the other hand, Ranen Banerjee, partner and head of PwC’s economic advisory in India, said that the US Fed has reduced the size of the increase to 25 basis points, the consumer price index is in the acceptable RBI range, the yield gap between the US and India has widened to about 3 .75 percentage points, sluggish exports and the need to keep government and private sector borrowing costs low, the MPC doesn’t have much reason to raise the rate further.
“The only argument in favor of raising the rate will be too early a pause, which could lead to a weakening of inflation expectations. And on that front, given that our inflation is driven primarily by demand rather than supply, the arguments are weak.
“So we shouldn’t be surprised if the majority in the MPC does go on pause or increase the repo rate by 10-15 basis points in terms of signals,” he said.
Speaking recently at the 22nd Annual FIMMDA-PDAI Conference, RBI Governor Shaktikanta Das said that with some easing of COVID-related restrictions and cooling inflation in various countries, albeit still high, central banks have begun what appears to be a reversal to a lower rate. trips or breaks.
“At the same time, they continue to resolutely reaffirm their determination to bring inflation closer to their targets. Higher policy rates for longer periods seem likely in the future. On the growth side, projections are now shifting towards a milder recession compared to the severe and wider recession projected a few months ago,” he said.
Das said that in this hostile and uncertain international environment, the Indian economy remains resilient, relying on its macroeconomic fundamentals.
“Our inflation remains elevated, but there was a long-awaited decline in November and December 2022,” he said. Core inflation, however, remains robust and elevated, the governor added.
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(This story was not edited by the News18 staff and is published from a news agency syndicated channel)