Interest rates to be at higher levels in FY24 as long as inflation is up

The interest rates in India will continue to be at a higher level next fiscal as inflation continues to be sticky at a higher level, said experts and several reports.

"The interest rates will remain at higher levels as it looks unlikely that the Reserve Bank of India (RBI) will cut rates. There is a possibility of another rate hike based on how inflation turns out in the coming month," Madan Sabnavis, Chief Economist, Bank of Baroda told IANS.

Sabnavis also said with the US Federal Reserve going for two hikes, the world will be through a phase of higher rates.

Credit rating agency Acuite Ratings and Research said the RBI will continue with monetary tightening and will hike the policy rate by 25 basis points (bps).

Acuite Ratings expects the RBI to persist with monetary tightening to guard against generalisation of core inflation pressures into a wage-price spiral.

"After a hike of 25 bps in Apr-23, MPC (Monetary Policy Committee) could opt for a pause for impact assessment. The stance may change to 'neutral' only after core inflation witnesses a sustained decline to below 5 per cent," Acuite Ratings said.

According to Acuite Ratings, over the last three months, inflation has begun to descend from peak levels across most economies in the world. The upshot from this development has been a step down in monetary policy aggression by most central banks despite the persistence of monetary tightening.

Morgan Stanley in a report said that the RBI may hike the repo rate in April and peg the terminal rate at 6.75 per cent.

A shallow rate cut cycle (of cumulative 50 bps) from 1Q24 as visibility on durable moderation in inflation improves, the report said.

Global credit rating agency Moody's Investors Service has predicted India's inflation rate at 6.1 per cent for 2023 and 5.5 per cent for 2024.

In February 2023, the RBI's MPC hiked the repo rate (the rate at which RBI lends to the banks) by 25 basis points (bps) to 6.5 per cent. This takes the cumulative hike in repo rate to 250 bps since May 2022.

The RBI had projected the inflation at 6.5 per cent in 2022-23, with Q4 at 5.7 per cent. And assuming a normal monsoon, RBI projected the CPI inflation at 5.3 per cent for 2023-24, with Q1 at 5.0 per cent, Q2 at 5.4 per cent, Q3 at 5.4 per cent and Q4 at 5.6 per cent.

However, in a shocker, consumer price index (CPI) inflation touched 6.5 per cent in January, after being 5.72 per cent in December and 5.88 per cent in November last year, a worrisome factor, economists had said.

Given the situation, experts are of the view that the RBI will continue with hiking rates but at a lower rate.

Moody's said the Central bank, having embarked on the most aggressive monetary policy tightening in decades, are now at a precarious juncture, faced with the question: Is the magnitude of rate hikes undertaken thus far adequate to quell inflation?

While there is a sense that the end to tightening is near, it is unclear how many more rate increases would be appropriate and for how long interest rates will remain restrictive. The Central bank's decisions will evolve according to wage and inflation dynamics, Moody's said.

(Venkatachari Jagannathan can be reached at v.jagannathan@ians.in)

--IANS

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