RBI policy: MPC may raise repo rate 35-50 bps, shows Business Standard poll

Many expect the RBI to lower the GDP growth estimate to 7%

The Reserve Bank of India’s (RBI’s) Monetary Policy Committee (MPC) is likely to lift the policy repo rate by 35-50 basis points (bps) on September 30, according to a Business Standard poll, as it seeks to bring back elevated domestic inflation within its target range.

Analysts said that a heightened pace of policy tightening by central banks in advanced economies is also seen as increasing pressure on the RBI to continue front-loading rate hikes to maintain adequate interest rate differentials.

The mode of the Business Standard poll comprising 12 respondents was the expectation of a 35-bp hike by the MPC, following its three-day review meeting starting September 28. The repo rate — the rate at which the RBI lends to banks — is currently at 5.40 per cent.

Five of the institutions polled predicted a 35-bp rate hike, while four expected an increase of 50 bps. According to one institution, there could be a 40-bp rate hike; two provided ranges of 25-35 bps and 35-50 bps, respectively.

With Russia’s invasion of Ukraine in late February exacerbating supply-side disruptions and leading to a sharp rise in prices of several global commodities, India’s Consumer Price Index (CPI)-based inflation has remained out of the RBI’s target band for several months. The latest data showed retail inflation at 7 per cent in August; the price gauge, thus, has remained above the RBI’s target zone for the first eight months of 2022. 

The RBI’s target for CPI inflation is 4 per cent, with a flexibility of 2 per cent on either side.

“We are looking at a 50-bp hike now. We were earlier expecting a 25-bp hike, but changed our view after the CPI print, which came in at 7 per cent — the rationale being that global central banks are not really slowing down their quantum or pace of policy hiking,” said Rahul Bajoria, chief India economist at Barclays.

“In fact, we’ve only seen the BoE (Bank of England) and the ECB (European Central Bank) increase their magnitudes; the Federal Reserve is likely to hike by 75 bps again. Inflation stays out of the range and the current account deficit looks relatively wide. So, there’s no reason for the RBI to hold back,” he said.

The US Federal Reserve has hiked rates by 225 bps, so far, in 2022, exerting pressure on currencies across the board, including those of emerging markets. The rupee has depreciated 6.8 per cent versus the dollar in 2022, so far.

Growth forecast and stance

The RBI’s policy stance over the past few months has been a matter of debate among analysts as the central bank has not shifted to a tightening stance, or a neutral one despite having raised interest rates by 140 bps since May.

In the August policy review, the MPC said that it remained focused on the withdrawal of accommodation. Given that the rate cuts delivered in the aftermath of the Covid crisis have been reversed, analysts speculate that the RBI may have been referring to the withdrawal of liquidity in the banking system which still remains at a surplus, albeit a much lower level than that existed two years ago.

Four institutions in the poll expect the RBI to announce a change in stance, with three predicting a shift to a neutral stance and one expecting a tightening stance. Barclays has not commented on the stance.

Under a neutral stance of monetary policy, the RBI has the flexibility to loosen or tighten monetary policy; a tightening stance implies only higher rates and tighter financial conditions.

Most respondents see no change in the RBI’s inflation forecasts; only two expect a downward revision. The RBI has forecast CPI-based inflation at 6.7 per cent in the current financial year, with the price gauge seen at 7.1 per cent in the current quarter, 6.4 per cent in October-December, and 5.8 per cent in January-March.

The respondents that were in favour of a lower inflation forecast cited the recent drop in crude oil prices as a key factor. The RBI estimated the average price of the Indian crude oil basket at $105 per barrel while making inflation assumptions. Brent crude prices were last around the $95 per barrel-mark.

Seven of the 12 respondents expected a downward revision in the RBI’s GDP growth forecast of 7.2 per cent for FY23, given that growth in the first quarter of the current year fell way short of the central bank’s projections. GDP growth was at 13.5 per cent in April-June versus the RBI’s estimate of 16.2 per cent. The respondents expecting the central bank to trim its GDP growth estimate now peg it around 7 per cent.

Still, many economists were optimistic about growth prospects, given the continuing revival of economic activity and a likely increase in government spending in the last six months of the current fiscal year.

“We believe the underlying growth momentum will improve in the remainder of the year, with demand for contact-intensive services to strengthen further,” said Icra’s Chief Economist Aditi Nayar. “We also expect the pace of government and private capex to improve in the second half of the year vis-à-vis the current levels, providing a larger impetus to growth in H2FY23,” she added.