Reserve Bank widely seen delivering final 25 bps hike, say economists

By Swati Bhat

MUMBAI (Reuters) - India's central bank is widely expected to raise its policy interest rate by a quarter percentage point to mark its final increase in the current tightening cycle on Wednesday before pausing to assess the impact of its hikes, economists said.

"With inflation now having clearly passed the peak and domestic demand showing signs of softening, we think the MPC (monetary policy committee) will mark the end of the tightening cycle with a final 25bp hike to the repo rate," said Shilan Shah, senior India economist at Capital Economics.

Annual retail inflation edged down in December from the previous month and remained within the central bank's comfort zone 2%-6% range for a second consecutive month amid cooling food prices.

"This policy decision is likely to be a very close call between a pause and a final hike of 25 bps," said Aditi Nayar, chief economist at rating agency ICRA.

"Given the expected moderation in inflation in Q1FY24, uneven domestic demand and uncertain external demand, it may be an opportune time to pause," she added.

A Reuters poll, conducted before the government announced its 2023/24 budget on Feb. 1, found 40 of 52 economists and analysts expected the RBI to raise the repo rate by 25 basis points to 6.50%.

The remaining 12 predicted no change at the Feb. 8 meeting.

Interviewed by television channel CNBC-TV18 after the budget, Finance Minister Nirmala Sitharaman said the downtrend in inflation should reduce pressure on the RBI to keep raising interest rates at the same pace, while adding that it was the Monetary Policy Committee's decision.

The budget contained one of India's biggest ever increases in capital spending to create jobs, while also targeting a reduction in the fiscal deficit.

Markets reacted positively to the lower-than-expected borrowing numbers but investors are concerned about demand for government debt falling in the second half if demand for credit from private firms for capex gathers steam.

With this in mind, investors will scrutinise the RBI's commentary regarding the future trajectory of rate hikes, liquidity and management of the government's borrowing programme.

Economists at State Bank of India said, of the record gross borrowing of 15.43 trillion rupees in 2023/24, around 2 trillion rupees may not find adequate demand from market participants.

To balance the demand-supply in second half of the financial year, the SBI economists said the central bank may need to resort to open market purchases of bonds, or conduct a cash neutral debt switch - buying back bonds maturing in the near future and replacing them with longer maturity bonds.

Barclays said they expect the policy stance also to be changed to neutral, where it was last in December 2018, when the repo was 6.50%.

 

(Reporting by Swati Bhat; Editing by Simon Cameron-Moore)