Most financial sector insiders expect the Monetary Policy Committee (MPC) to settle for a modest 25 basis point repo rate hike at its policy review meeting this week. .
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The MPC will begin its three-day deliberations on the next set of monetary policies on Monday, with the decision to be announced on February 8.
Reserve Bank of India Governor Shaktikanta Das, in his latest bi-monthly monetary policy statement on December 7, stressed that: “Core inflation is showing stickiness. While headline inflation may decline for the remainder of the year and the first quarter (April-June): 2023-24, it is expected to run above target. In general, the MPC considered that a more calibrated monetary policy action is justified to keep inflation expectations anchored, break the persistence of core inflation and contain second round effects. ”
Referring to the aforementioned statement, experts are of the opinion that MPC may opt for one more rate increase to ensure that inflation remains within the target (4 percent +/- 2 percent).
However, some are of the opinion that MPC can hit the pause button. They cited the latest retail inflation and IIP readings to support their case.
Bank of Baroda economists, in a report, said: “Going forward, the overall liquidity situation needs to be tracked as surpluses have declined to a near-neutral state. RBI policy will be monitored in this regard.
“The MPC would persist with another rate increase to bring the repo rate to 6.5 percent for this cycle before a pause.”
The MPC has increased the repo rate (the interest rate at which banks withdraw funds from the RBI to overcome short-term liquidity mismatches) cumulatively by 225 basis points (from 4% to 6.25%) in fiscal year 23 thus far.
The MPC last raised the repo rate by 35 basis points from 5.90% to 6.25% on December 7. he. Before that (on September 30, 2022), the committee had raised the repo rate by 50 basis points, from 5.40% to 5.90%.
Kotak Securities, in a report, said the global inflation environment is gradually turning benign, though inflation is still well above each central bank’s target. Inflation is likely to moderate further in the coming months, leading to the end of the rate hike cycle in the first half of calendar year (CY) 23 and possible rate cuts in late 2023 or early 2024.
“However, given the large global uncertainties, the levers for central banks to support growth through monetary easing remain limited, so they risk higher rates for an extended period.
“We expect the RBI MPC to hike the policy rate by 25 bps to 6.5 percent, followed by a protracted wait-and-watch approach as it assesses the lagged impact of monetary tightening on growth and inflation,” the minister said. report.
Pause at the next meeting?
Pankaj Pathak, Fixed Income Fund Manager, Quantum AMC, noted that inflation has come down substantially over the past three months and is showing further downward momentum. External conditions have also improved with slower rate increases in the US.
RBI’s foreign reserves have also risen in recent months.
Given these developments, MPC is expected to stop the rate-raising cycle at the February meeting and keep the repo rate at 6.25 percent for an extended period, Pathak stressed.
“You could also change the policy stance to Neutral (from the current ‘remove hosting’ stance). The bond market should react positively. We expect bond yields to fall gradually, although the elevated supply of bonds will limit the fall in yields,” he said.
