Analysts See RBI Taking Policy Rates Well Above Pre-pandemic Levels by March


Citing the aggressive wording to tame inflation, analysts expect the Reserve Bank to deliver more rate hikes during the current fiscal and take key policy rates to well above the pre-pandemic levels.

Earlier in the day, the RBI-led MPC delivered a 50 bps hike in the key policy rates to 4.90 percent but left the cash reserve ratio unchanged and sounded more concerned about inflation management, as it has withdrawn the accommodative stance.

The central bank has also increased the inflation forecast by 100 bps to 6.7 percent in a span of two months.

Describing the monetary policy announcement as aggressive and moves beyond just frontloading interest rate increases, HDFC Bank NSE 0.35 % chief economist Abheek Barua said the central bank seems far more concerned about inflation now, which is well reflected in its upward revision in its inflation forecast by 100 bps to 6.7 percent while remaining relatively more sanguine on growth impulses.

The RBI-Monetary Policy Committee is concerned about the broad-based nature of the rise in inflation and the risk of the second-round impact on inflation expectations. Therefore, the policy rate is likely to be raised well beyond the pre-pandemic level, close to 6 per cent by fiscal year-end, Barua said.

He is also expecting the rally in bond yields — post the policy announcement due to no CRR hike — to be short-lived amid elevated oil prices and rising global yields.

Echoing similar views, India Ratings principal economist Sunil Kumar Sinha said though rate actions are expected to balance the inflation growth dynamics, the MPC has stated that it will remain focused on the withdrawal of accommodation, as system liquidity continued to be high with daily absorption under the LAF averaging Rs 5.5 lakh crore during May 4-31, 2022.

On May 4, the RBI delivered an unscheduled 40 bps rate hike.

The monetary authority has done the right thing by hiking the policy rates to anchor both inflation and inflationary expectation, he said.

Sinha is expecting another 25-50 bps hikes during the course of the year as the central bank expects inflation to be at 7.5 percent in Q1, 7.4 percent in Q2, 6.2 percent in Q3 and 5.8 percent in Q4, averaging the fiscal price index at 6.7 percent.

The repo rate will go up well beyond 6 percent by the end of the fiscal, he said.

Icra NSE -0.19 % chief economist Aditi Nayar is also expecting the rates to go up further.

More rate hikes remain clearly on the table, and the repo rate can go up by 35 bps and 25 bps, respectively, in the next two policies, Nayar said.

Bank of Baroda NSE 1.62 % chief economist Madan Sabnavis said the policy stance indicates that the major threat to the growth process is inflation. While growth is expected to proceed on a stable path, inflation has to be addressed urgently, which means more rate hikes on an anvil that will lead to a longer time to move to a positive real interest rate regime.

He is expecting the policy transmission pace to be slower, given the surplus liquidity in the system.

Barclays India’s Rahul Bajoria said the RBI revising up inflation forecasts but keeping the growth projection signals its intention to keep inflation at the centre of its decision making, and desire to return to the pre-pandemic policy stance as soon as it can. Accordingly, the brokerage expects the policy rate to reach 5.75 per cent by December, up from its earlier forecast of 5.15 percent.

According to Bajoria, the RBI may raise the repo rate by 35 bps to 5.25 per cent in the next meeting in August, unless there is a dramatic improvement in prices, which looks unlikely though.

He also said the MPC has messaged the ‘withdrawal of accommodation’ to ensure that inflation stays within target.

Over the next three meetings in August, October, and December, we expect the RBI to make inflation management its key priority, which could include steps to curb aggregate demand, Bajoria said.

In terms of sequencing, we now expect the RBI to deliver a 35 bps rate hike in August, and then raise the policy rate by 25 bps to 5.50 percent in October, while also switching to a neutral stance. Beyond that, we expect RBI to deliver one more rate hike in December to 5.75 percent, which we now believe will mark the end of this cycle, he added.

These hikes will allow the RBI to lean its policy stance towards tightening while maintaining a neutral stance by the end of the calendar year, he said.

Crisil NSE -1.32 % in a note said it expects the RBI to increase the repo rate by another 75 bps this fiscal, and take it to 50 bps above the pre-pandemic level. But this will not, however, hit growth in the current fiscal because monetary policy impacts the real economy with a lag.

And that tightening will begin its impact growth from the last quarter of this fiscal and to a greater extent next fiscal, the note added. (Economic Times)