Will RBI slow down the pace of repo rate hikes ahead?
Premium- The central bank has already raised the repo rate by 1.4% in three consecutive policies, taking the rate at 5.40% currently, to tame multi-year high inflation.
The Reserve Bank of India (RBI) is likely to slow down the pace of the hiking policy repo rate going forward. Experts are expecting a much lower rate hike in the September 2022 monetary policy compared to the previous three rate hikes. The central bank has already raised the repo rate by 1.4% in three consecutive policies, taking the rate at 5.40% currently, to tame multi-year high inflation. However, India's consumer price index (CPI) has moderated for three months in a row, raising hopes for a slower pace in rate hikes which has already made EMIs on loans costlier and deposits attractive.
RBI hiked the repo rate by 40 basis points in May, followed by 50 basis points hike each in July and August respectively. CPI inflation which is at 6.71% in July, has been above RBI's target limit for the seventh consecutive month.
In its note, the Deutsche Bank expects RBI to respond with a slower pace of rate hikes from September policy, based on the expectation in the recently released minutes of the meeting of the Monetary Policy Committee (MPC).
Further, the Germany-based bank's note stated that "with RBI having delivered significant front-loaded rate hikes thus far, we think the central bank can now resort to hiking rates in clips of 0.25%, particularly if the (US) Fed reduces its pace of rate hike to 0.50% from September onwards," reported by PTI.
In the minutes of the meeting, RBI governor Shaktikanta Das said, "Our actions today are tailored towards first bringing the CPI inflation within the target band and then taking it close to the target of 4% over the medium term while supporting growth. The sequence of our policy measures is expected to strengthen monetary policy credibility and anchor inflation expectations."
"Our actions would continue to be calibrated, measured and nimble depending upon the unfolding dynamics of inflation and economic activity," Das added.
However, in their latest research report, Kotak Securities explained that the minutes of the August MPC meeting highlighted the need for continued rate hikes to ensure monetary policy credibility. Members noted that while inflation may have peaked, significant uncertainties and upside risks warrant further rate hikes to anchor inflation expectations."
Further, Kotak's note said, "Members were wary of near-term upside risks to inflation stemming from (1) INR depreciation, (2) rise in GST rates, and (3) uneven distribution of the southwest monsoon."
"The MPC minutes restate our view that the frontloaded rate hikes by the MPC will temper the need for aggressive future rate hikes amid (1) global disinflationary pressures, and (2) the likely lagged impact of monetary tightening on inflation. However, given the near-term uncertainties, we see the need for additional rate hikes to manage inflationary expectations," Kotak's note added.
That said, Kotak has retained its view of the repo rate at 5.75-6% by end-CY2022.
The six-member MPC has remained focused on the withdrawal of accommodation to ensure that inflation remains within the target going forward while supporting growth.
Kotak expects the MPC to drop the phrase “withdrawal of accommodation" from the resolution and shift towards a neutral stance (likely in the December policy).
Meanwhile, Research analysts Kajal Gandhi and Vishal Narnolia at ICICI Direct in their research note said, "We believe inflation, in the early part of the next financial year, could be below RBI’s projection of 5.0% given crude oil prices have also now started to moderate from elevated levels. Even assuming medium-term inflation at 5.0% and the real rate at 1.0%, the terminal repo rate is likely at around 6.0%, leaving the future rate hike of 60 bps in the rest of the financial year."
Further, the duo said in their note, "Therefore, out of the total 200 bps rate hike in the current rate hike cycle, 140 bps is already behind us and the rest is well discounted by the bond market. Accordingly, yields across the curve are likely to be range bound in near future with volatility emanating from changing market perception and evolving data points."
The analysts explained that the risk of a higher rate hike could only emerge from global factors rather than domestic factors like continuous rate hikes by US Fed, currency depreciation pressure due to yield differential, and any further supply-side disruption due to ongoing geo-political tension.
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