MPC may raise rate by another 25 bps as inflation woes persist: BS Poll

All eyes on policy stance, pause signal

The Reserve Bank of India (RBI) is likely to increase repo rate for a seventh straight policy review as headline inflation continues to remain above the mandate, a majority of the respondents of a Business Standard Poll said.
 

Eight of the 10 respondents said the Monetary Policy Committee (MPC) was expected to lift the policy repo rate by 25 basis points (bps) to 6.75 per cent in the first bimonthly review for the financial year 2023-24.
 

Consumer price-index based inflation — the main yardstick of the central bank for policy-making purposes — was 6.44 per cent in February and 6.52 per cent in January.
 

The RBI has a mandate to keep inflation at 4 per cent — within a band of 2 per cent on either side. Average inflation staying beyond this band for three consecutive quarters constitutes failure of the central bank. In 2022, the average inflation was above 6 per cent in January-March, April-June, and July-September quarters. 

“Given still elevated inflation and good growth, the RBI can afford to press on with the hiking cycle for now,” said Rahul Bajoria, managing director and head of EM Asia (ex-China) Economics, Barclays.

In the last policy review, two of the external members voted against the 25-bp rate hike while arguing the central bank should wait to see the impact of previous rate hikes.

Soumya Kanti Ghosh, group chief economic advisor, State Bank of India, expects a pause in the April policy. Instead of a 25-bp hike, the RBI can do a smaller one like 10-15 bps to give a decisive communication to the market, he said.

“The RBI’s dilemma is to look through the food price shocks and the core stickiness. Stickiness of the core has been a statistical trend over the last decade and it is only the transport and communication sub-segment that moves the needle. With fuel prices unlikely to be changed by the government, the stickiness in core is unlikely to be reversed,” Ghosh told Business Standard.

Core inflation — CPI inflation excluding food and fuel — was sticky in recent times.

Some respondents expect the central bank to decide to pause after the April rate hike.

“The decision to hike the policy rate in this meeting remains a close call,” Goldman Sachs said in a note to its clients. “…the MPC may choose to pause at this meeting itself while maintaining tight liquidity and retaining the policy stance of “withdrawal of accommodation” to keep the option of further tightening open, while watching global developments,” the note said.

The MPC has been continuing with the ‘withdrawal of accommodation’ stance since the beginning of the rate hike cycle. While most respondents said the stance was likely to be continued though some said it was time to change it to neutral.

“We expect a 25-bp hike (close call) with neutral stance and non-committal on forward guidance, following the template of Fed and European Central Bank. This could be perceived as a dovish hike by the RBI,” said Madhavi Arora, lead economist at Emkay Global Financial Services.

Most respondents said the central bank was unlikely to change its inflation and growth forecast for 2023-24. RBI’s inflation projection was 5.3 per cent and growth forecast was 6.4 per cent for FY24.

“They are likely to factor in the impact of El Nino and the ongoing banking crisis in the US and EU in their growth projection for FY24 and lower it to 6 per cent from the current projection of 6.4 per cent,” said Rupa Rege Nitsure, group chief economist at L&T Financial.