A majority of the financial sector experts expect the Monetary Policy Committee (MPC) to settle for a moderate repo rate hike of 25 basis points in its policy review meeting this week. .


The MPC will start its three-day deliberations on the next set of monetary policy on Monday and the decision will be announced on February 8.

Reserve Bank of India Governor Shaktikanta Das, in his last bi-monthly monetary policy statement on December 7, had underscored that: “Core inflation is exhibiting stickiness. While headline inflation may ease through the rest of the year and Q1 (April-June):2023-24, it is expected to rule above the target. On balance, the MPC was of the view that further calibrated monetary policy action is warranted to keep inflation expectations anchored, break core inflation persistence and contain second round effects. ”

Referring to the aforementioned statement, experts are of the view that MPC may go for one more rate hike to ensure that inflation remains within the target (4 per cent +/- 2 per cent).

However, some are of the view that MPC may press the pause button. They cited the latest retail inflation and IIP readings to buttress their case.

Bank of Baroda’s economists, in a report, said: “Going ahead, the overall liquidity situation needs to be tracked as surpluses have dwindled to a near neutral state. The RBI policy will be watched in this regard.

“The MPC would persist with another rate hike to bring the repo rate to 6.5 per cent for this cycle before a pause.”

The MPC has hiked repo rate (the interest rate at which banks draw funds from RBI to overcome short-term liquidity mismatches) cumulatively by 225 basis points (from 4 per cent to 6.25 per cent) in FY23 so far.

The MPC last hiked the repo rate by 35 basis points from 5.90 per cent to 6.25 per cent on December 7 th. Prior to that (on September 30, 2022), the committee had raised the repo rate by 50 basis points, from 5.40 per cent to 5.90 per cent..

Kotak Securities, in a report, said that the global inflation environment is gradually turning benign although inflation is still well above every central bank’s target. Inflation will likely moderate further in the next few months, leading to the end of the rate hiking cycle by first half of Calendar Year (CY) 23 and possible rate cuts in late-2023/early-2024.

“However, given large global uncertainties, central banks’ levers for supporting growth through monetary easing remain limited, thereby risking higher rates for an extended period.

“We expect the RBI MPC to hike policy rate by 25 bps to 6.5 per cent, followed by a prolonged wait-and-watch approach, as it assesses the lagged impact of monetary tightening on growth and inflation,” the report said.

Pause at the next meeting?

Pankaj Pathak, Fund Manager- Fixed Income, Quantum AMC, observed that inflation has come down substantially over the last three months and is showing further downward momentum. External conditions have also eased with slower rate hikes in the US.

RBI’s foreign exchange reserves have also increased over the last few months.

Given these developments, MPC is expected to pause the rate hiking cycle in the February meeting and will maintain the repo rate at 6.25 per cent for an extended period, emphasised Pathak.

“It might also change the policy stance to Neutral (from the current ‘withdrawal of accommodation’ stance). Bond market should react positively. We expect bond yields to go down gradually though elevated bond supply will limit the downside of yields,” he said.