RBI has already increased the repo rate by a total of 250 basis points since May 2022 in a bid to contain inflation.
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The RBI’s rate-setting panel on Monday started its three-day meeting amid expectations that the central bank may go for a 25 basis points hike in benchmark interest rate. Experts feel that this rate hike would be probably the last in the current monetary tightening cycle that began in May 2022.
Experts are of the view that the central bank will raise the key policy rate (repo) by 25 basis points. The RBI has so far raised repo rate six times including the off-cycle surprise increase of 40 basis points in May last year.
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Reserve Bank Governor Shaktikanta Das-headed Monetary Policy Committee during its three-day meeting (April 3, 5 and 6) is expected to take into account various domestic and global factors before coming out with the first bi-monthly monetary policy for fiscal 2023-24.
The decision of the six-member rate setting panel will be announced by the Governor on Thursday.
The two key factors which the committee is expected to deliberate while firming up the next monetary policy are elevated retail inflation and the recent action taken by central banks of developed nations especially the US Federal Reserve, the European Central Bank and Bank of England.
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“Given that CPI inflation has been 6.5 % and 6.4 % in the last two months and that liquidity is now near neutral, we may expect the RBI to raise rates once again by 25 bps and probably change stance to neutral to signal that this cycle is over,” Madan Sabnavis, chief economist, Bank of Baroda had said recently.
Having remained below six % for two months (November and December 2022), the retail inflation breached the RBI’s comfort zone in January, warranting action by the central bank.
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The Consumer Price Index (CPI)-based inflation was 6.52 % in January and 6.44 % in February.
The central bank has already increased the repo rate by a total of 250 basis points since May in a bid to contain inflation, though it has continued to remain above the RBI’s comfort zone of 6 % most of the time.
The RBI has been tasked to ensure that retail inflation remains at 4 % with a margin of +/-2 %. However, it failed to keep the inflation rate below six % for three consecutive quarters beginning January 2022.
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Parry Singh, founder and CEO, Red Fort Capital, highlighted the possibility of hiking the benchmark interest rate by 25 to 30 basis points.
“The recent actions taken by central banks of developed nations must’ve added to the pressure on the RBI. Despite this, experts believe that this rate hike will be the last in the current monetary policy tightening cycle that began in May 2022,” Singh added.
Singh added that while the rate hike may help to curb inflation, it could also have an impact on investments, repayments, and economic growth which has already been affected by the pandemic. It remains to be seen what decision the RBI will make at the end of its meeting.
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Jyoti Prakash Gadia, managing director, Resurgent India, too felt that the RBI is expected to go in for one more round of repo rate increase of 25 basis points.
Gadia added the current macroeconomic uncertainties in the country and sticky inflation, coupled with global tightening and control are expected to prompt RBI to be cautious and continue with the rate increase.
The supply side issues, likely to be created due to unseasonal rains damaging the crops, is another pressing factor for the additional inflation control requirement.
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The central banks, world over are watching the situation with anxiety, following the failure of some leading Banks in US and Europe, and the RBI may not be in a position to take a pause as regards the repo rate increase at this stage, Gadia added.
“Although the GST collection and exports are indicating a positive sign, the growth inflation trade-off is still tilted in favour of more pressing and immediate inflation control. The rate increase therefore may not be avoidable at least for the current round of review even though the revival of the economy which is still at nascent stage would soon require a pause in the repo rate increase.”
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The RBI may therefore also shift its stance to neutral taking into account the growth needs in the medium to long term.’
The MPC consists of three RBI officials and three external members appointed by the central government.
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The external members are Shashanka Bhide (Honorary Senior Advisor, National Council of Applied Economic Research, Delhi); Ashima Goyal (Emeritus Professor, Indira Gandhi Institute of Development Research, Mumbai); and Jayanth R Varma (Professor, Indian Institute of Management, Ahmedabad).
