The Reserve Bank of India's (RBI) rate-setting committee MPC's (Monetary Policy Committee) three-day deliberations started today. The panel, which will announce key policy rates on February 8, may this time go for a smaller, 25 basis points repo rate hike or could put a pause on increasing key rates, in the wake of easing retail inflation in India, and the U.S. Federal Reserve going slow on its rate hiking spree.

On the retail inflation front, since the country's headline inflation has moderated in the months of November and December 2022, falling to a one-year low of 5.72% in December 2022 from 5.88% in the previous month, it’s expected to continue the declining trend.

Notably, the CPI (Consumer Price Index) inflation has fluctuated in the range of 4.8% (since January 21), the core CPI has remained sticky at around 6% during the same period, SBI Research says in its latest report. "We believe core CPI could gravitate towards 5.5% or lower in the interregnum, as headline CPI move towards 5% in FY24.”.

The note, written by SBI Chief Economist Soumya Kanti Ghosh, says the RBI may "pause" the repo rate hike in February policy. "In the current rate cycle, rate actions, both hikes and cuts, have been largely synchronised. We find evidence that synchronised rate actions have resulted in increased market volatility and financial stability in both the period – the post-global financial crisis and the current regime. A nonsynchronous monetary policy action in 2023 by central banks across the world could thus materially result in lower volatility and financial stability. The RBI might take cues as financial stability takes precedence," the note says.

The central bank, in its previous MPC meeting, in December had hiked the key repo rate by 35 basis points to 6.25% after the inflation showed signs of easing. "We believe at 6.25%, it could be the terminal rate for now," says SBI Research. The central bank had also decided to remain focused on the “withdrawal” of the "accommodative" policy stance to ensure inflation remains within the target going forward while supporting growth.

SBI adds that with the CPI headline inflation expected to decline closer to 5% by March 2023 and 4.2% in April, the RBI is expected to go for "withdrawal of accommodation" even as liquidity is close to neutral. "Even though the RBI could pause as it allows past rate actions to work with long and variable lags, the RBI could still guide the markets with a rate action in future that will be purely data dependent," says the report.

Monetary tightening to continue in 2023 with Fed, ECB (European Central Bank) and BOE (Bank of England) expected to hike rates at a moderate pace, says SBI. Notably, the Fed earlier this week increased its benchmark rate by 25 basis points to 4.75%. "This will keep the boil on emerging market central banks to follow Fed, though markets seem to have largely become agnostic to macros globally…pause may be the new normal and markets will be happy to accept that this will keep capital flowing into emerging markets."

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