Though financial conditions are expected to enter the tighter zone, they are unlikely to hinder growth this fiscal, a Crisil report said
The Reserve Bank of India is expected to raise the repo rate by another 25 basis points (bps) in the September meeting, with the terminal repo rate unlikely to cross 6 per cent this fiscal, according to Crisil.
The repo rate (the interest rate at which banks borrow funds from RBI to overcome short-term liquidity mismatches) has been increased cumulatively by 140 bps in FY23 so far, with the last hike from 5.40 per cent to 5.65 per cent being effected on August 5.
These rate hikes come in the wake of spillovers from geopolitical shocks, imparting considerable uncertainty to the inflation trajectory.
“Monetary policy seems to be at a crossroads. So far, the RBI has been aggressive with rate hikes, as inflation has been above the target, and the US Federal Reserve (Fed) has been hiking its policy rate to a great extent.
RBI’s pace of tightening
“Yet, any sustained change in inflation and the Fed’s trajectory could alter the RBI’s pace of tightening in the second half of this fiscal,” said Dharmakirti Joshi, Chief Economist; Dipti Deshpande, Principal Economist; and Pankhuri Tandon, Economist, Crisil, in a report.
The economists noted that falling international commodity prices have reduced upside risks on domestic inflation. That said, the impact of the monsoon on food inflation remains a monitorable.
Referring to S&P Global’s expectation that the Fed will raise rates by another 75 bps in 2022 and 50 bps by mid-2023, the economists observed that the Fed could, however, change its aggressive stance if recession does materialise next year.
“Considering these factors, we expect the RBI to raise the repo rate by another 25 bps in the September meeting. Beyond that, the pace of hikes will be guided by incoming data on inflation and the Fed’s actions in the second half this fiscal.
Tighter conditions, but no risk to growth
“Broadly, though we expect financial conditions to gradually enter the tighter zone, we do not believe they will hinder growth this fiscal,” they said.
The report emphasised that the shock of the Russia-Ukraine war is getting replaced by growing concerns of a global economic slowdown.
For domestic financial markets, this has brought a mix of positive news (falling commodity prices) and negative news (strengthening dollar).
RBI has been steady on rate hikes, and withdrawal of excess liquidity and a tightening bias continues as inflation remains above the upper tolerance band of 6 per cent, they added.