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The Monetary Policy Committee may slow down the pace of rate hikes, preferring a 25-35 basis points increase in the policy repo rate to deal with the twin challenge of above target inflation and slowing growth.
Simultaneously, there is also a possibility of the GDP projection of 7 per cent for FY23 being revised downwards.
While some economists believe the monetary policy stance will be changed from “withdrawal of accommodation” to “neutral”, others say the current stance will be continued.
The MPC is scheduled to meet from December 5 to 7.
The MPC has upped the repo rate cumulatively by 190 bps since May 2022 from 4 per cent to 5.90 per cent.
After initiating the tightening cycle in May 2022 via a 40-bps hike in repo rate, the Committee increased therate thrice by 50 bps each so far in the face of 10 consecutive months of above-target (6 per cent) inflation.
Madan Sabnavis, Chief Economist, Bank of Baroda, observed that the Reserve Bank of India will be presenting the monetary policy against the backdrop of GDP growth slowing down as well as inflation being high above 6 per cent.
“We do believe that the MPC will continue with rate hikes this time though the magnitude will be lower - probably 25-35 bps.
“More specifically we do believe that the terminal repo rate for the financial year will be 6.5 per cent, which means there will be one more rate hike in February,” he said.
MPC is unlikely to change the stance and the withdrawal of liquidity will continue, opined Sabnavis.
While the RBI will take a hard look at both the GDP and inflation projections, there could be some downward revision for GDP growth, he said.
Pace of rate hikes
Kaushik Das, Chief Economist, India & South Asia, Deutsche Bank, expects RBI to deliver a 35-bps rate hike in the December 7 policy, taking the repo rate up to 6.25 per cent, from 5.90 per cent currently.
“With the Fed indicating its desire to slow down the pace of rate hikes to 50 bps clips and October US CPI momentum easing relative to expectations, thereby reducing the depreciation pressure on rupee, we think the MPC will be comfortable to dial down the pace of rate hikes to 35 bps in December.
“Beyond December 2022, however, we are not sure whether the MPC will want to move further in the February 2023 meeting with a 25 bps hike to take the repo rate up to 6.50 per cent,” Das said.
He opined that between December and February, the headwinds to growth may become more evident and given the lags in monetary policy transmission, the MPC may decide not to hike further, allowing the lagged impact of the cumulative rate hikes to have its desired impact on the real economy and core inflation.
Policy rate now closer to neutral
Rahul Bajoria, MD & Head of EM Asia (ex-China) Economics, Barclays, expects the MPC to deliver a 35-bps rate hike at the December meeting, bringing the repo rate to 6.25 per cent before it shifts to a neutral stance.
“While inflation is moderating, in our view, 10 consecutive months of above-target inflation warrants caution from policymakers…given our assessment that the policy rate is now closer to neutral (and positive on an ex-ante basis), this should also be the time for the monetary policy committee to shift its policy stance to neutral,” he said.
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