ET Poll: RBI may pause rate action with 25 bps hike this week

One basis point is 0.01 percentage point.

Nine of 10 economists polled by ET ahead of Thursday’s policy announcement expect a 25-bps increase. This week’s rate action is expected to be followed by a prolonged pause, with some respondents anticipating no further rate action for the remainder of FY24.

Economists at Goldman Sachs expect inflation for January-March 2023 to be 50 basis points higher than 5.7% projected by the Reserve Bank of India (RBI) in its February policy, and an upside risk to food inflation might not allow easing in price pressures.

They expect RBI to raise rates by 25 bps to take the repo rate to 6.75%. “With considerable uncertainty around the commodity prices path and global growth, RBI is likely to retain the tightening policy stance,” Goldman Sachs said.

Economists say the monetary policy is at an ‘inflection point,’ with a pause the most likely outcome after the April policy.

IndusInd Bank chief economist Gaurav Kapur also expects a 25-bps increase but predicts a change in RBI’s stance from withdrawal of accommodation to neutral.”We could see a prolonged pause after that, with rates being data dependent, particularly with risks to inflation in terms of monsoon and also uncertainties about growth,” Kapur said. “But there is a good 80-basis point favourable base effect from March that will ease inflation.”

Economists from Barclays, Deutsche Bank, Care Ratings, Bank of Baroda, DBS, Kotak Mahindra Bank and Yes Bank expect a 25-bps increase on Thursday and a pause after that.

Real Rates
Deutsche Bank India economist Kaushik Das said RBI is most likely to increase rates and also retain its withdrawal of an accommodative stance, “arguing that real rates (repo rate – CPI inflation) are barely positive, with CPI inflation currently being close to 6.50%.”

Consumer price inflation rose to 6.44% in February, breaching RBI’s 6% ceiling for the second straight month, mainly because of rising food prices that account for nearly 40% of the Consumer Price Index (CPI) basket.

However, some economists believe RBI may have already done enough, raising rates by a cumulative 250 basis points, especially with inflation statistically likely to be on a downward trajectory.

Siddhartha Sanyal, chief economist at Bandhan Bank, is the only respondent who expects RBI not to raise rates this week. “India’s real policy rate is set to hover around 100 basis points in three to six months, while maintaining a policy rate differential of about 150 basis points with the US,” he said.

“In the current EBLR (external benchmark linked lending rate) regime of immediate and fuller passthrough of repo rate hikes to lending rates, one expects the central bank to go slow after 250 basis points of rate hikes during the year. A narrower trade balance and range-bound rupee should offer RBI better comfort,” said Sanyal.

India’s current account deficit declined to $18.2 billion, or 2.2% of the GDP, in the third quarter, from $30.9 billion (3.7% of GDP) in the previous quarter.

Liquidity Concerns
DBS Bank senior economist Radhika Rao said inflation will hold sway over global financial concerns. “Liquidity is likely to be the other consideration, as the banking system balance slipped into deficit in March due to seasonal advance tax outflows,” Rao said. “While the central bank might step in to thaw conditions via ad hoc variable repo rate operations, preference will be to keep the net liquidity balance close to non-inflationary neutral or slight deficit, with relief expected by way of government spending or likely return in portfolio inflows.”

Madan Sabnavis, chief economist, Bank of Baroda, expects RBI to change to a neutral stance to reflect a paucity of liquidity in the system. “By changing the stance to neutral, the message conveyed will be that we are at the end of the cycle of increasing rates. The signal will also be to let the market know that liquidity will be provided to ensure stability,” Sabnavis said.