Economists and analysts expect the Reserve Bank’s monetary policy committee to continue to hike rates until the key rate reaches neutral 6-6.5 percent by the end of this fiscal year.
The MPC marked the third consecutive rate hike since May with a 50 basis point gain in the latest round on Friday. Now the repo rate stands at 5.40 percent, which is above pre-pandemic levels. In February 2020, the key interest rate was 5.15 percent.
“We believe the current cycle of policy rate hikes is expected to continue until the Reserve Bank of India reaches the so-called ‘neutral policy rate’,” said Sunil Kumar Sinha, chief economist at India Ratings.
According to him, the neutral policy rate is the short-term policy rate that is expected to stabilize the economy in the long run by allowing the economy to realize its growth potential, but keep inflation within the target range and inflation expectations well anchored.
Under the current macroeconomic environment, “we think this neutral policy rate is between 6 and 6.5 percent,” he added.
He also pointed out that future rate hikes, in addition to being guided by the evolving geopolitical situation, would also be data dependent.
Swiss brokerage UBS Securities said it expects the MPC to raise its repo rate further to 5.75 percent by the end of FY23. Going forward, rate hikes would depend on data as uncertainties remain high for both the growth and inflation outlook, it added.
Tanvee Gupta-Jain, chief economist of UBS Securities India, has based her increased rate hikes on the widening current account deficit, which is likely to reach 3.5-4 percent of GDP in the first half of this fiscal year.
Rahul Bajoria, chief economist at Barclays India, said he expects another 50 basis points increase by December, noting that the policy focuses heavily on the external position.
Radhika Rao, the Senior Economist at Singaporean lender DBS, said that with inflation likely to remain above target through early FY24, more gains are in the pipeline and expects a 75bp more gain in March as current levels is already at the same level as the third quarter. from FY19.
The tone of the inflation assessment was cautious, highlighting “unacceptable” and uncomfortable prevailing levels, as the RBI has highlighted the risk that continued high inflation could destabilize inflation expectations and hurt growth in the medium term, she said.
“We maintain our call for at least another 75 bps increases by March 2023, provided inflation approaches its peak in 2QFY23 and gradually declines below 6 percent in the March quarter,” said Mr. Rao.
Dharmakirti Joshi, the chief economist at Crisil, said the MPC has raised the rate by more than 25 basis points from pre-pandemic levels, meaning price pressures are unfolding.
The increase in the repo rate was necessary because, despite some easing, inflation is still well above the upper limit of tolerance and monetary policy is affecting it with some delay, he said.
According to Joshi, the third rate hike in the current budget also partly resolves the spillover risks of an aggressive stance by the US Federal Reserve and other systemically important central banks.
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