Experts see four rate hikes in FY23, beginning June: BS Poll of economists

Nearly 7% retail inflation in March may spur policy tightening

India’s retail inflation rate, which touched nearly 7 per cent in March, could trigger a series of repo rate increases by the Reserve Bank of India (RBI), a survey of economists by Business Standard has showed.

While all the participants surveyed agreed that the interest rate hike cycle could begin in June, 90 per cent of them said there could be two to eight hikes, which means interest rates might go up by 50-200 basis points (bps) in the current financial year. Half of the participants expect at least four repo rate hikes in FY23.  

Most of the participants see consumer price index (CPI)-based inflation averaging 6.2 per cent in FY23, as against the 5.7 per cent projected by the RBI during the monetary policy review last week.

“The growth recovery faces downside risks, but with the inflation outturn materially to the upside and momentum still rising, we are lifting our terminal repo rate forecast to 6 per cent by Q3 2023, with a 25 bps rate hike at each of the next eight MPC meetings,” Nomura said in a report.

Commodity prices started rising sharply following the Russia-Ukraine conflict. This prompted the six-member monetary policy committee (MPC) to turn hawkish in the April meeting as it changed its focus to exit from the ultra-loose policy, which was in force since the start of the Covid-19 pandemic two years ago. The RBI continued with its accommodative stance in the April policy but said the MPC decided to remain accommodative while focusing on withdrawal of accommodation to ensure that inflation remains within the target.       

The MPC has not changed interest rates since May 2020, when the repo rate was cut by 40 bps.

Retail inflation averaged over 6 per cent in January-March. The RBI estimates CPI inflation at 6.3 per cent in April-June and 5.8 per cent in July-September.

Aditi Nayar, chief economist, ICRA, who also sees a rate hike in June, said after the March CPI inflation numbers: “We now expect to see 50-75 bps of rate hikes by the end of Q2 FY2023, followed by a pause in H2 FY2023, and perhaps another 50 bps of hikes in FY2024.”

The bond market also reacted sharply after the central bank sounded hawkish. The yield on the 10-year benchmark bond zoomed 30 bps since the policy announcement. The yield on the 10-year government bond ended the day at 7.21 per cent on Wednesday.

“We now expect a 25-basis point rate hike each in June and August, with a cumulative rate hike of 75 basis points in the cycle. Given that the spread between G-sec yields and repo rate jumps in an increasing interest rate cycle, G-sec yields could touch 7.75 per cent by September,” said Soumya Kanti Ghosh, group chief economic adviser, State Bank of India.

The central bank also indicated that real interest rates could move into positive territory, as Deputy Governor MD Patra said, “…I think what has been aptly explained by the Governor is that we have started a process, a focus on withdrawal of accommodation, that is the path back towards a positive real rate. So it’s a dynamic situation.”

“With inflation realities worsening, a June hike is quite likely. FY23 could see policy rates going up by 100 bps, and the terminal rate may be around 5.25 per cent+ with the RBI now showing intent to keep real rates near zero,” said Madhavi Arora, lead economist, Emkay Global.

Even if a rate hike cycle would start soon, sluggish growth recovery is one factor that could hold back the central bank from hiking interest rates sharply.

“Although we believe the RBI will start hiking rates in June, we suspect it will be unable to deliver the total amount of hikes the market is currently pricing in given growth concerns,” said Sreejith Balasubramanian, economist - fund management, IDFC AMC.

“In addition to the lacklustre private domestic demand recovery, global growth faces headwinds from slowing consumer sentiment and aggressive policy normalisation in the US, still underappreciated slowdown in China, persistent geopolitical concerns, etc. These factors imply the normalisation cycle could be shorter and the terminal overnight rate in this cycle lower than in the previous one,” Balasubramanian added.