After three consecutive hikes of 50 basis points, the Reserve Bank of India is expected to slow the pace of monetary tightening in its bi-monthly policy announcement on December 7. Headed by RBI Governor Shaktikanta Das, the six-member Monetary Policy Committee (MPC) will begin its three-day policy meeting on Monday. The central bank is widely expected to opt for a lower rate hike of 35-50 basis points (bps) in interest rates, along with a change in policy stance from “withdrawal of accommodation” to “neutral” indicating further action to be data-dependent, experts believe.

In the last MPC meeting on September 30, the RBI had hiked the repo rate, the rate at which RBI lends money to commercial banks, has been hiked by 50 basis points to 5.40% to combat uncomfortably high inflation level. Consequently, the standing deposit facility (SDF) rate was adjusted to 5.65% and the marginal standing facility (MSF) rate and the bank rate to 6.15%. The panel also decided to remain focused on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth.

The RBI will be presenting the monetary policy against the backdrop of GDP growth slowing down as well as inflation being high above 6%. Consumer Price Index (CPI) based retail inflation fell to a three-month low of 6.77% in October, down from 7.41% in September 2022. However, it remained above the RBI upper tolerance band of 6% for the 10th consecutive month. Meanwhile, India's GDP growth slowed to 6.3% in the July-September quarter of 2022-23, after hitting double digital growth in the previous quarter.

Here’s what experts have to say about upcoming RBI policy:

Madan Sabnavis, Chief Economist at Bank of Baroda, said, “We do believe that the MPC will continue with rate hikes this time though the magnitude will be lower - probably 25-35 bps. More specifically we do believe that the terminal repo rate for the financial year will be 6.5%, which means there will be one more rate hike in February,” said Sabnavis.

Sabnavis further added that there would be no change in the policy stance and the withdrawal of liquidity is likely to continue. “While the RBI will take a hard look at both the GDP and inflation projections, there could be some downward revision for GDP growth,” he added. 

Virat Diwanji, Group President & Head - Consumer Bank, Kotak Mahindra Bank believes that the MPC may go for a mild to moderate tweaking of the interest rates, citing that the rupee is holding itself steady and crude prices are hovering in the comfortable zone. “A marginal upward revision of 35 bps is expected this December, followed by another 25 bps hike. However, this will depend on inflation, demand, and global factors particularly U.S. Dollar rates and volatility."

Global brokerage Goldman Sachs expects the RBI to hike the repo rate by 50 bps in the December 2022 policy meeting. Given upside risks to core services inflation, and India running negative real rates, this will be followed by a 35 bps rate hike in February 2023 which would take the key policy rate to a peak of 6.75%, writes Santanu Sengupta, India economist, Goldman Sachs.

“Assuming 100 bps real rates, the terminal repo rate in India could be 6.25%. We expect a 35 bps hike in the December policy, along with a change in monetary policy stance from “withdrawal of accommodation” to “neutral” indicating further action to be data-dependent. Post this hike, the overnight rates in India would have increased by 300 bps during CY 2022,” says Deepak Agrawal, Chief Investment Officer, Debt Fund, KMAMC.

Apurva Sheth, Head of Market Perspectives, Samco Securities, said that the market anticipated a rate increase of 35 bps rather than 50 bps, while the MPC's forecasts and views on inflation and economic expansion would be closely watched.

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