The Reserve Bank of India (RBI) is expected to continue raising interest rates to tackle a burgeoning inflation problem, while it is likely to maintain an accommodative policy stance to support the economy battered by the coronavirus pandemic and the Russia-Ukraine war. Most of the market analysts expect the six-member monetary policy committee (MPC) of the RBI to hike the policy rate (repo rate) by up to 50 basis points (bps) to 4.9% on June 8, when it will unveil its policy statement. The apex bank is also expected to move away from the ‘ultra-accommodative’ stance to a more ‘neutral to hawkish’ stance.
In a surprise move, Governor Shaktikanta Das-led MPC had raised repo rate by 40 bps in an off-cycle policy announcement in May to ease inflationary pressure on the economy. This was the first time since August 2018, when the repo rate, the interest rate at which the central bank lends to commercial banks, was raised to changing inflation-growth dynamics in the backdrop of the Russia-Ukraine crisis.
With inflation not showing immediate signs of abating, the RBI is seen extending its 40 bps repo hike of May with an increase in the range of 40-50 bps in June, followed by 25 bps each in August and September. Retail inflation, or Consumer Price Index (CPI), surged to a near 8-year high of 7.79% in April, persisting above the RBI's inflation target of 6% for the fourth straight month.
Here’s what analysts expects from MPC meeting:
Ashish Chaturmohta, director, research group, JM Financial Services, says India currently faces the heat of "imported inflation" owing to rising crude prices, supply chain disruption and global liquidity absorption. He adds it has been the first time in the last several years that the RBI and the government are both working in a synchronised way to bring down the inflation.
“Hence, to control the same, the government has played its role by reducing petrol/diesel prices, bringing in restrictions for exports in order to keep the domestic market stable etc, and on the other hand, RBI has been very proactive in their actions, which was clearly visible from their 40 base points surprise rate hike,” says Chaturmohta.
“We believe the rate hike would be around 30-40 bps along with a stable outlook on the GDP,” he adds.
Indranil Pan, chief economist, YES Bank, believes it is not an easy job for the central banker, given that economic growth remains in its recovery stage. “Recently released GDP data showed a sliding y-o-y growth for private consumption expenditure, an indication that economic activity remains slow. On the other hand, the inflation surprise has brought to the fore the need for the RBI to tighten monetary policy. The government has also joined the RBI in an attempt to contain inflationary pressures in the economy.”
“We see the RBI extending its 40bps repo hike of May with a 35 bps increase in June, followed by 25bps each in August and September. By this time, we expect the global growth to have softened enough to pull down commodity prices and thus provide some comfort to the domestic inflation cycle too. We thus factor in the RBI to press the pause button again after a 15bps insurance hike in the repo rate in December and analyse the implications of its rate hike cycle of 140 bps on growth before taking any further decision,” says Pan.
Ravi Subramanian, MD & CEO of Shriram Housing Finance, says, “The RBI has turned cautious following the April shocker of 7.79% CPI inflation. The regulator is expected to increase the repo rate by another 25-50 bps in June. By the end of H1FY23, we see the Repo rate in the range of 5.15-5.50%, as the pace of hikes is likely to tighten once Repo reaches the pre-pandemic level of 5.15%.”
“Heightened geo-political and global economic uncertainty resulting in supply-side shocks is the major reason for the spike in inflation. The rate hike cycle may be aggressive but not necessarily lengthy, as domestic demand numbers would also be watched closely. Demand for home loans in the affordable segment remains buoyant aided by stable real estate prices and more people returning to the work-from-office model," adds Subramanian.
Ashish Khandelia, founder of Certus Capital, expects the repo increase to be between 40-50bps in the upcoming MPC meeting with future increases leading to around 5.75% (where we were exactly 3 years ago) or upwards by the end of FY23. “Last 40 bps increase in May caused home loans to move into the 7% +/- range from ~6.5% earlier. And by the end of this financial year, home loan rates will likely touch ~8%. This is unlikely to derail the housing momentum but it will certainly soften it. Coupled with increasing prices, the growth may slow down a bit in FY23, after a record FY22."
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