With retail inflation surprising on the upside, the six-member Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) is expected to raise the repo rate by 35-50 basis points (bps) on review. scheduled for September 28. -30.
According to economists, the central bank will continue to focus on reducing inflation even though economic growth has remained sluggish.
Data released by the government on Monday showed that consumer price index (CPI)-based inflation rose 7 percent year-on-year (YoY) in August, thus remaining above the central bank’s upper tolerance limit for every eight months of 2022.
The Industrial Production Index (IIP), on the other hand, disappointed as it grew at a slower pace of 2.4 percent year on year in July from a jump of 12.7 percent in June.
“Sticky inflation and weakening growth add to the policy dilemma, but we expect inflation to remain a top priority for now as policy rates remain below neutral,” Nomura said in a note.
Nomura expects a hike of 35 bps in September and 25 bps in December for a terminal rate of 6 percent. “At the margin, the August CPI data suggests that the September MPC decision may be somewhere between a 35bps hike and a 50bps hike, rather than a 25bps hike,” he said.
The rate-setting panel has increased the policy repo rate by 140 bps to 5.4 percent since May, but real interest rates remain negative as inflation remains above 6 percent. CPI inflation is expected to average more than 6 percent for the current fiscal year.
“From a policy response perspective, we expect the normalization of monetary policy to continue to preserve macro stability. We expect a 35bp rate hike at the September policy review. We expect CPI inflation to remain around 5.3 percent in FY24 and therefore believe normalization of real rates is warranted,” Morgan Stanley said.
Under the RBI Act, the central bank is mandated to keep inflation at 4 percent, plus or minus 2 percent. If average inflation remains above the 2-6 percent range for three consecutive quarters, it is considered a failure of monetary policy and the central bank is mandated to write a letter to the government explaining the reason for its failure and the steps to follow. taken to correct the situation.
A report from the State Bank of India said that inflation is expected to drop in a jiffy in the second half of the fiscal year.
“Although the August print is above the RBI target for the eighth consecutive month, we strongly believe that after October India will witness the downward trajectory of inflation. The core CPI also rose moderately to 5.84 percent in August,” the report says. SBI said the September rate hike will be close to 35-50 bps. “Beyond September, we are targeting a minimal and symbolic rate hike as inflation is likely to fall in a jiffy in H2FY23,” he added.
The SBI report estimated that the 140 bps increase in the repo rate has increased the interest cost of retail and MSME clients by around Rs 42,000 crore. The report expects the RBI to consider this when deciding on future rate increases.
However, YES Bank says that the priority for the central bank and the government will be to focus on stopping inflation surprises.
“Even as growth surprised on the downside (from RBI’s own expected levels) for Q1FY23, we don’t see RBI moving away from the pedal immediately. Therefore, we ask that the RBI stay ahead and once again increase the repo hike by 50 bps on the 30-Sep policy,” said YES Bank.
In the August policy review, the RBI maintained its 7.2 percent GDP growth forecast for the current fiscal year. The growth forecast for the April-June quarter was 16.2 percent. However, official data released by the government late last month showed GDP grew 13.5 percent in the first quarter.