RBI may hike policy rate by 25 bps, last in this series

The MPC is likely to maintain its stance of 'withdrawal of accommodation' and ease the pace of rate increases, an analyst said

In its first monetary policy review after the Union Budget, the Reserve Bank of India (RBI) is likely to hike the repo rate by 25 basis points (bps) on Wednesday and give an indication for a long pause or reversing the cycle as core inflation eases sequentially.

The three-day meeting of the Monetary Policy Committee (MPC), the six-member rate-setting panel of the RBI, started on Monday. RBI Governor Shaktikanta Das is scheduled to announce the MPC decisions on Wednesday, after the conclusion of the meeting.

The RBI has raised the repo rate by 225 basis points or 2.25 per cent since May 2022. In its previous policy review in December, the RBI raised repo rate by 35 bps to 6.25 per cent. Repo rate is the interest rate at which the RBI lends money to commercial banks.

According to analysts, the RBI may hike the repo rate to 6.5 per cent on Wednesday. The MPC is likely to maintain its stance of “withdrawal of accommodation” and ease the pace of rate increases, said Ravi Subramanian, MD & CEO of Shriram Housing Finance.

Subramanian said the RBI may go for a modest 25 bps increase in repo rate as inflationary pressure has eased. “Retail inflation is within the upper tolerance band of 6 per cent and food inflation has eased off. Housing credit growth has been leading retail credit growth, rising by over 15 per cent.”

Churchil Bhatt, Executive Vice President & Debt Fund Manager, Kotak Mahindra Life Insurance Company, said the bond markets have already factored in a 25 bps increase in policy rates.

"Bond markets are already pricing in one final 25 bps rate hike going in this policy. However, we believe there is a case for MPC to deliver a status quo policy and resist from incremental policy tightening at this juncture. This in our view will be a positive surprise for bond markets and may lead to moderate softening in yields," Bhatt said.

Industry bodies are pitching for a pause in rate hike to support growth. "At a time when India stands out as one of the fastest growing economies of the world, a pause in the policy rate hike would provide stimulus to the growth trajectory," said Assocham Secretary General Deepak Sood.

"Central banks of the world are in admiration of the way RBI has navigated growth and inflation dynamics. The RBI has the luxury of raising rates or deferring them as inflation is cooling off and growth is stable. The market will be looking forward to the guidance on the borrowing programme of FY24," said Nilesh Shah, Managing Director, Kotak Mahindra Asset Management Company.

S&P Global Ratings said the RBI should not go for a further hike in policy rates as inflation has been declining sequentially. "Core inflation has been elevated for longer; however, it eased sequentially in the second half of 2022. An already elevated 6.25 per cent policy rate limits the need for further increases," S&P Global said in a report.

The consumer price index (CPI) based retail inflation, which the RBI tracks for its policy action, eased to 5.72 per cent in December from 5.88 per cent in the previous month. The headline inflation declined below 6 per cent in November after remaining above the RBI’s upper tolerance limit of 6 per cent for 10 consecutive months.