RBI MPC Meeting: Reserve Bank of India may raise repo rate by 25 bps on April 6, cut by year-end
Since May 2022, the RBI has hiked rates by 250 basis points, hurting borrowers and some are already concerned about loan tenures extending beyond their working lives as a result of the hikes.
The Reserve Bank of India (RBI) may go for a final 25 basis points increase in the current rate hike cycle next week, however, economists expect the central bank to cut rates by the end of the third quarter of FY24.
As per media reports, RBI officials met economists on Tuesday, and the latter have suggested the central bank to go for a 25 basis points hike in key rates. Since May 2022, the RBI has hiked rates by 250 basis points, hurting borrowers and some are already concerned about loan tenures extending beyond their working lives as a result of the hikes.
The RBI has been hiking rates with an eye to tame inflation, which mostly remained beyond the upper tolerance limit of 6 per cent.
“I am leaning towards a further and final 0.25 percentage point hike in rates,” Saugata Bhattacharya, Chief Economist at Axis Bank, told reporters, adding that the hike will tame the stubbornly high core inflation.
He also said the slowdown in growth (visible in anecdotal evidence at present), coupled with some cool down in inflation, should prompt the six-member Monetary Policy Committee to cut rates by the end of the third quarter of FY24.
Bhattacharya also noted that it is too early to change the ‘withdrawal of accommodation’ stance of the RBI and that some tweaks can be expected in the way it is communicated at the next review on April 6. The RBI will shift the stance to ‘neutral’ in the June review, he added.
“We expect RBI to hike policy rate by 25bps in April. Domestically CPI inflation remains elevated at 6.4% and more importantly core CPI inflation remains uncomfortably high at 6.2% in February. At the same time, growth conditions in India have held-up, providing monetary policy space to focus on Inflation. Externally, the Fed is still indicating one more 25bps hike (likely in May). Hence both domestic and external factors support a 25bps hike by RBI in April,” added Gaura Sengupta, economist at IDFC First Bank.
Bhattacharya said that anecdotal evidence points to signs of a slowdown in growth, which makes him peg the FY24 real GDP growth estimate at 6 per cent, much below the RBI's own estimate of 6.4 per cent.
He said the evidence includes working capital cycles getting elongated, non-bank lenders not being able to pass on rate hikes to their borrowers for fear of losing business, low-cost automobile sales getting impacted largely because of higher compliance costs pushing up prices of end goods, and, low and mid-level housing projects witnessing sluggish sales and enquiries.
The predictions of the economists came after the Fed raised the rate by 25 bps on March 22. “If the regional banking situation in the US takes a turn for the worse ahead of the RBI’s meeting, the possibility of a pause by the RBI remains. Thereafter the central babk is expected to keep rates on hold as transmission of past rate hikes seeps through the system. For bond yield, expect a range of 7.25-7.35% as lower global yields pull yields down while pressure from domestic supply in the new fiscal put a floor for yields,” added Sakshi Gupta, senior economist at HDFC Bank.
Bhattacharya said the resilience shown by the economy in maintaining the growth momentum is remarkable, but ultimately, the aggregate demand is bound to get impacted because of the hikes and also other factors.
He pointed out that the increased investments by multinationals setting up shops in India, and creating relatively higher paying jobs is helping the overall demand situation at present.
He said that the RBI will go for a rate cut of 25 basis points by the end of the third quarter of FY24, when growth slowdown will become more evident, and once the inflation cools down to 5-5.50 per cent range to exhibit a clear trend.
This will result in the FY24 exit in the key repo rate at 6.50 per cent, the same level as at the start of the fiscal, he added. Bhattacharya said that globally there are uncertainties in the overall economic climate, and never before in the economic history have "we seen such kind of a phase".
The good news is that all the major fast paced economic indicators in the US and also Europe are turning better, he signed off saying.
(With input from PTI)
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