Hike interest rates by 25-35 basis points in Dec: Economists to RBI

Economists on Friday suggested top officials of the Reserve Bank of India to raise interest rates by 25-35 basis points (bps) next month while continuing to signal vigilance on inflation, sources told Business Standard.

The meeting was held ahead of the RBI’s next monetary policy review, which is scheduled December 5-7.

The economists also recommended that the RBI maintain its current stance of remaining “focused on withdrawal of accommodation,” sources said.

“Today, most people were recommending a 25-35 bp rate hike and for them (the RBI) to speak hawkish. Hike less but speak hawkish. They also recommended that the stance be kept the same. That was the general feedback. They (RBI) didn’t say much, as usual, just heard them out,” a source said.

“The rationale would be that it would be difficult for them to prematurely signal any softening of policy when you have such external volatilities and the trade balance being the way it is. Unless FPI flows show some sense of stability returning they would have to be cautious,” the source said.

An email sent to the RBI did not receive a response by the time of going to press.

Since May 4, the RBI’s Monetary Policy Committee has hiked the benchmark policy repo rate by a total of 190 bps to 5.90 per cent. The last three rate hikes have each been in tranches of 50 bps.

The latest data, however, showed that inflation has eased, while still remaining well above the RBI’s 4 per cent target and the MPC’s 2-6 per cent tolerance band. CPI inflation was at 6.77 per cent in October, down from 7.41 per cent a month ago.

Sources said the RBI had held a similar meeting earlier this month with economists in New Delhi. The discussions at that meeting were primarily focused on the external sector and the outlook for the Indian currency.

While the meeting came after a lower-than-expected inflation print in the US, sources said the tone of the meeting was one of caution. Easing US inflation makes a case for the Federal Reserve to slow down on rate hikes. Higher US interest rates reduce the rate differential with India, diminishing the appeal of domestic assets and exerting pressure on the rupee.

“There was of course relief about the fall in US inflation but the broad sense is that it is far too early for the RBI to signal a softer policy, given the uncertainties in outlook. That was what was communicated to the RBI,” a source said.

The rapid pace of monetary policy tightening since May was largely due to the abrupt upside risks to domestic inflation posed by Russia’s invasion of Ukraine in late February. The repo rate is now well above the rate that existed at the beginning of the Covid-19 crisis in India in March 2020.

If one accounts for the RBI’s move in April to institutionalise the Standing Deposit Facility (SDF) at a higher rate than the reverse repo rate, the total rate hikes increase by 40 bps.

The SDF replaced the reverse repo as the floor of the RBI’s interest rate corridor.

The release of the September inflation data in October marked the official failure of the MPC to ensure that inflation does not stay outside of its 2-6 per cent tolerance band for three successive quarters.

Consumer Price Index (CPI) inflation has been above the RBI’s 4 per cent target for 37 consecutive months.

Earlier this month, the MPC held a meeting to decide on the statement it will make to the government regarding the failure on the inflation mandate. According to the mandate, the MPC must provide reasons behind the failure, remedial actions being taken and a timeline within which inflation would be brought back to target. 

Expert prescription

• Relief on fall in US inflation, but it’s too early for RBI to signal a softer policy
• Continue with vigilant tone on inflation
• Maintain stance of remaining focused on withdrawal of accommodation
• Hike less but speak hawkish