After three consecutive hikes of 50 basis points, the Reserve Bank of India (RBI) this time may go for a lower repo rate hike of 35 basis points at its upcoming bi-monthly monetary policy announcement on Wednesday. "We expect the RBI to hike rates in smaller magnitude in December policy attuned to emerging market central banks and the overall rate-setting tone. With this, a 35-bps repo rate hike looks imminent. We believe at 6.25%, it could be the terminal rate for now...," the latest SBI Research said.
The RBI started its three-day PMC meeting today, which will conclude on December 7. Since May 2022, the central bank has increased the repo rate -- the interest rate at which the RBI lends money to banks -- by 1.9 bps to contain soaring inflation. The upcoming imminent rate hike could further push up your monthly EMIs and loans.
On the stance, if the current government cash balances are any indication, at ₹1 lakh crore, it might force RBI to change its stance to 'neutral', purely on technical grounds, says the report, written by Soumya Kanti Ghosh, chief economic advisor, SBI Research.
"However...given that Government cash balances are unlikely to decline any further as budget nears & Government cognizant of fiscal deficit in FY23 & capital inflows continuing...& US labour market continued tightness forcing Fed’s hand to raise rates beyond Feb 23, it may not be just yet to change the stance for RBI as it might confuse the markets...The good thing is that with capital inflows picking up a rapid pace in November, liquidity could get an unlikely buffer of rupee injection in lieu of $ purchases / building up reserves by RBI," said the report.
It says the U.S. labour markets are showing an uncanny knack of not correcting soon from the low unemployment rate, high vacancy rates and high wage growth. This could mean Fed extend its rate hikes beyond February 2023 and take the terminal fed fund rate beyond 5%. "This will keep the boil on emerging market central banks to follow Fed though markets seem to have largely become agnostic to macros globally….35 bps may be the new normal and markets will be happy to accept that….this will keep capital flowing into emerging markets."
SBI also says it expects geopolitical uncertainty, synchronised monetary tightening, and high energy prices clearly weigh on global growth in Q1 of 2023.
Like its global peers, India has been impacted by soaring inflation, prompting the RBI to announce tightening monetary measures. In the last MPC meeting on September 30, the RBI hiked the repo rate by 50 basis points to 5.40% to combat the uncomfortably high inflation. The MPC also decided to remain focused on withdrawing accommodation to ensure that inflation remains within the target in the future while supporting growth. India's retail inflation fell to a three-month low of 6.77% in October, down from 7.41% in September 2022.
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