In order to curtail the soaring inflation, the Reserve Bank of India (RBI) is expected to hike the key repo rate by 25 basis points to 6.75% in the next monetary policy committee (MPC), according to experts and rating agencies. With this, the apex bank is expected to pause the repo rate hike for the remainder of FY2024. The first meeting for the current fiscal will be held on April 3-5, 2023.

CareEdge Ratings says that the RBI’s decision in April is likely to be influenced by the unexpectedly high CPI inflation numbers recorded in January and February. In January and February, the country’s CPI inflation stood at 6.52% and 6.44%, respectively, which is above the RBI’s upper limit of 6%. CareEdge Ratings says that the spike in CPI inflation in the first two months of 2023, may push the policy outcome in favour of one more rate hike.

"Given the current backdrop of high inflation and mixed signals on growth, the Central Bank will need to walk a tightrope to achieve a delicate balance. We expect RBI to hike the repo rate by 25 bps in April to 6.75%. With the real rate turning positive and tight liquidity conditions, we also expect a change of stance from 'withdrawal of accommodation' to 'neutral'," the rating agency says.

In its last MPC, the apex bank hiked the repo rate for the sixth time in a row, by 25 bps, to 6.50% while withdrawing the "accommodative stance" to tame high inflation in the country. The rate hike by RBI was in line with the repo rate hikes by several counterparts in the past year. Earlier this month, the U.S. Federal Reserve raised the repo rate by 25 basis points for the 10^th time in a row, whereas the Bank of England has hiked the key repo rate, for the 11^th time in a row by 25 basis points to 4.25%. The European Central Bank (ECB) hiked the three key repo rates by 50 basis points, in line with its determination to ensure the timely return of inflation to the 2% medium-term target.

ICRA, which also expects RBI to hike the repo rate by 25 bps followed by an extended pause, anticipates that a narrow majority of MPC members may choose to vote for another rate hike in April 2023. "The anticipated April 2023 rate hike would take the repo rate to 6.75%, which is more than 100 bps higher than the MPC’s CPI inflation forecast for H2 FY2024, and may be adequate given that the GDP expansion is at best likely to be similar to potential GDP growth in that period. Thereafter, ICRA believes that the MPC should pause through the remainder of FY2024, and assess the transmission of policy tightening as well as the evolving risks to food inflation," ICRA says.

The central bank said that the headline inflation will remain above the 4% target in FY24.

Churchil Bhatt, Executive Vice President & Debt Fund Manager, Kotak Mahindra Life Insurance Company feels that it will be a catch-22 situation for the policy makers that will base its verdict on – 'a turbulent global economic landscape' versus 'a healthy, reasonably well-insulated domestic economy.'

"We expect a pause in April 2023 MPC meeting with no change in stance. Forward guidance by the MPC, if any, may be open-ended, leaving room for deft manoeuvrability depending on evolving circumstances in the global and domestic economy," says Bhatt.

Siddarth Bhamre, Executive Vice President, Research Head, Religare Broking Limited says that after years the country is witnessing real rates moving back into a positive trajectory. This will promote savings. "Positive domestic data and improving global scenario, a positive real rate indicates that the battle with inflation is won but the war against it is still going on. Amidst this, India continues to remain in a sweet spot with a higher growth rate and manageable inflation," Bhamre says.

Notably, this will be RBI’s first MPC outcome following the collapse of four US-based banks and one European bank. The collapse of Silicon Valley Bank, Signature Bank, Silvergate Bank and First Republic in the US and Credit Suisse in Europe, earlier this month has sent the global financial industry into a frenzy mode as they try to avert a contagion which is touted to be worst than the 2008 financial crisis. Experts believe that the recent global development will weigh heavily on the monetary policy outcome next month.

"Expect MPC to deliver its final rate hike. The recent global developments will be weighing heavily during the policy decision-making by the MPC. With domestic inflation also remaining at elevated levels we expect a 25 bps hike in the Repo rate followed by a prolonged pause," says Upasna Bhardwaj, Chief Economist, Kotak Mahindra Bank.

Rating agency Moody, however, says that the collapse of U.S.-based banks is likely to have a limited impact on global banking systems. The rating agency says that the impact will be limited for most rated financial institutions in Asia-Pacific (APAC) because of structural factors. According to the rating agency, most APAC institutions are not exposed to failed US banks, and only a handful of institutions have immaterial exposures.

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