Significantly lower probability of 75 bps hike for mid-December: SBI Research

The Reserve Bank of India (RBI) is likely to hike the repo rate by 50 basis points in mid-December, with a significantly lower probability of a 75-basis-point hike, according to SBI Research.

The banking regulator had last week said that an additional meeting of its monetary policy committee (MPC) has been scheduled to take place on November 3.

The unscheduled meeting on November 3 is only a part of the regulatory obligation, SBI Research says, adding it does not foresee any other agenda to be announced at this meeting, even as it is scheduled a day after the Fed meet on November 2.

When the RBI fails to meet the inflation target for three consecutive quarters, it is required to set out in a report to the central government listing the reasons for failure to achieve the inflation target; remedial actions proposed to be taken by the bank; and an estimate of the time-period within which the inflation target shall be achieved. Also, in the event of failure of the RBI to meet the inflation target, a separate meeting is required to be scheduled by the secretary to the committee, as part of the normal policy process to discuss and draft the report to be sent to the government.

"The report is required to be sent to the government within one month from the date on which the bank failed to meet the inflation target. As the September 2022 inflation data was revealed on October 12, the RBI has to submit the report to the government before November 12," says SBI Research.

The research unit of India's largest public sector lender further says the unseasonal rains in several parts of the country in October this year are affecting kharif crops significantly. In states like UP, the unseasonal rain was more than 400% above normal. Overall, India has received a staggering 54% above normal rains in October so far.

"We believe that along with grains, the prices of vegetables, milk, pulses and edible oils, which account for over a quarter of the overall CPI, are rising and likely to remain high in coming months. During 2019, when India’s October rainfall was 44% above normal, the 3 months average food CPI was a whopping 10.9% as against 4.9% in the preceding 3 months. This indicates that unseasonal rains may have a large negative impact on food inflation in coming months," says SBI Research.

On bank deposit rates, SBI Research says banks have adjusted deposit rates significantly upwards in October. "If we look at the historical interest rate cycles, the increase in deposit rates lag the increase in lending rates. Also, given that 45% of bank deposits are CASA, it is only the 55% of term deposits that need adjustment and hence ideally, there will always be less than full adjustment of deposit rates to repo rates. In the current cycle, with a CASA ratio of 45%, a 190 basis point increase in repo rate could result in 105 basis point increase in deposit rate (190*55%). Any deposit rate increase beyond that will be an additional one. To put things in perspective, SBI has already raised its 1 year deposit rate by 100 basis points," writes Soumya Kanti Ghosh, group chief economic adviser, State Bank of India.