Economists Expect Smaller But More Rate Hikes By A Hawkish RBI

India’s Monetary Policy Committee hiked the benchmark repo rate by 50 basis points to 5.4%—its third straight increase—as its efforts continue to quell inflation in the economy. Further rate hikes seem imminent, economists say, although the quantum could ease.

“With the RBI retaining the policy stance of ‘withdrawal of accommodation’, the implicit message is that rates are yet to reach neutral territory, and that more rate hikes are warranted—a view that we agree with,” Aurodeep Nandi, India economist and vice president at Nomura, said.

The RBI continues to signal that all options are on the table, which is a prudent strategy given the elevated levels of uncertainties on growth as well as inflation, he added.

What is noteworthy is that the central bank has not revised its existing growth or inflation forecasts despite indications of a global slowdown, recessionary conditions in the developed economies, and the moderation already witnessed in commodity prices, said Suman Chowdhury, chief analytical officer at Acuité Ratings & Research.

Possibly, it would like to go through more data points over the next two months before reviewing these forecasts, he said. At this point, the central bank believes that India’s growth in the current year would be largely resilient with the mitigation of risks of a monsoon failure and a healthy pickup in rural demand, Chowdhury said.

“While we await the inflation print for Q2FY23, we believe that rate hikes going ahead will be moderate and there can even be a pause if the CPI data throws up figures closer to 6% over the next two-three months,” he said. For now, however, one can expect further deposit and lending rate hikes by banks, given the improved credit demand in the economy, he added.

Arun Singh, global chief economist at Dun & Bradstreet also said the probability of further rate hikes has gone up during the remaining part of the year given the global financial tightening and escalating geopolitical tensions with consequences on the supply chain.

The depreciation pressures on the rupee are mounting from the continued net FII outflows and there are concerns about widening the current account deficit. However, the increase in repo rate hike is likely to be smaller as growth is expected to moderate sharply.

“We revise our terminal rate forecast to 5.75-6% from 5.5%,” Nikhil Gupta, chief economist at Motilal Oswal Financial Services group, said.

“Overall, the RBI’s action and statement today was not as dovish as we expected”, Gupta said. Therefore, it is very likely that the terminal rate in this rate hike episode will be higher than expectations, he said, revising the forecast.

Even after total rate hikes of 180 basis points including April, the RBI has kept the FY23 real GDP growth forecast unchanged since April, which is perplexing, Gupta said.How will higher interest rates tame inflation without hurting growth?” He forecasts growth at 6-6.5% in FY23, compared to the RBI’s forecast of 7.2%.

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