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The monetary policy committee (MPC) is likely to vote for a 25 basis points hike in the policy repo rate at its next meeting, scheduled from April 6-8, as the February MPC review minutes highlighted internal members’ elevated concerns over core inflation and hawkish communication, according to economists.
Radhika Rao, senior economist, DBS, observed that the minutes of the Feb MPC review reflected concern over inflation, owing to uncertain geopolitics, volatile crude prices, and weather-related events.
Outside of food, inflation was seen at risk of hardening further, requiring calibrated action from policymakers.
The two dissenting members call for pause to allow the lagged impact of policy actions to play out, citing emerging growth risks.
“A majority of the MPC is likely to vote for a 25 bp hike in April, with an unchanged stance, due to an elevated January inflation outturn, sticky core, and a likelihood that February 23 inflation (out in mid-March) might also stay close to 6.3-6.5 per cent, before turning data dependent on the path ahead,” Rao said.
Kotak Securities Ltd’s (KSL) economists noted that the February MPC minutes highlighted internal members’ elevated concerns on core inflation while a few members were concerned about overtightening. Most members, however, expressed comfort on the growth front.
“We now expect the RBI MPC to hike the repo rate by another 25 bps in the April policy to 6.75 per cent given (1) persistently elevated core inflation, (2) volatile food prices, (3) increasing likelihood of a higher terminal rate in the US, and (4) uncertainty in commodity prices amid ongoing geopolitical conflicts and scale of revival in China,” according to KSL’s economists’ team comprising Upasna Bhardwaj, Suvodeep Rakshit, and Anurag Balajee.
Rising divergence
Rahul Bajoria, MD and Head of EM Asia (ex-China) Economics, Barclays, said the RBI’s latest minutes highlight clear and rising divergence among MPC members, but only two (external members) remain dovish, while the overall balance tilted towards more hawkishness.
“After the higher-than-expected January inflation, we think the balance of risks suggests another hike in April, barring any fiscal action to cool prices.
“...We also note that the hawkishness in the minutes does not even capture the latest inflation reading that came in higher than expected and back above the RBI’s inflation target. February inflation could also be above 6% in our view,” he said.
Bajoria opined that the balance of risks now suggests that another hike is likely at the next meeting in April.
“We pencil in another 25 bp hike by the MPC in our base case, with a 4-2 or 3-3 split, taking the repo rate to 6.75 per cent. However, we think policy actions by the government in March, such as passing through lower oil prices, may tilt the balance in favour of no move by the MPC,” he said.
Pause in hikes?
Soumya Kanti Ghosh, Group Chief Economic Adviser, State Bank of India, said: “Our current interest rate skewness Index is indicating that, going forward, rate hikes will either pause or be of lower magnitude (15 bps). Thus, space for further rate hikes looks low at the margin.”
Nomura economists Sonal Varma and Aurodeep Nandi expect GDP growth to slow to 5.3 per cent year-on-year in FY24 (RBI projection: 6.4 per cent) and CPI inflation to average 4.8 per cent (RBI: 5.3 per cent), which, in their view, calls for a pause to assess the impact of the hikes so far.
As growth and inflation are likely to lower after March, they expect the start of a rate-easing cycle from October.
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