RBI may keep rates on hold in April, say bankers 

Amidst the ongoing invasion of Ukraine by Russia that has impacted global oil and commodity prices, bankers and analysts expect the Reserve Bank of India to continue holding rates in the next monetary policy review in April.

“The expectation got pushed out from April to June in terms of a rate hike. Unless we see this crisis prolong and see commodity prices go up materially and feed into inflationary expectations….this is a wait and watch situation,” said Jaideep Iyer, Head-Finance, Strategy and Investor Relations, RBL Bank.

Oil and other commodity prices are much higher above the comfort zone, he said, but expressed hope that it will not sustain for very long.

Pralay Mondal, Deputy Managing Director, CSB Bank, also said that it is a difficult situation and markets are now betting that the US Fed will also not hike rates.

“But there is no runaway inflation in India, it is still within target. There is a lot of government borrowing planned this year and a lot of disinvestment. So, it will take a little longer than what we initially thought in terms of interest rate taking off. Things will start going up a little bit, maybe three to six months,” he said, while noting that there has been marginal increase in rates by some banks.

Rising crude oil prices

Global crude oil prices have gone up to over $118 a barrel on Thursday amidst escalating tensions and supply issues and economists point out that this is over the Budget math of about $ 75 a barrel.

The Monetary Policy Committee of the RBI has till now maintained policy rates and an accommodative stance as it tries to support economic growth. The next meeting of the MPC is scheduled during April 6 to 8.

Madan Sabnavis, Chief Economist, Bank of Baroda, said that after the policy review in February, our view was that the RBI would maintain its accommodative stance and the current rates would prevail at least for the first half of the year. But the situation has completely changed and issues of government borrowing and inflation have resurfaced once again.

“The government has already indicated that it may review the disinvestment of LIC while rising oil and commodity prices will impact inflation in India. Our expectation now is that there will not be an increase in rates in April. More importantly, the MPC will undertake a review of the entire stance and rates in the April policy with the first impact on stance, then the reverse repo and then the repo rate,” he said.

Saugata Bhattacharya, Chief Economist, Axis Bank, pointed out that for all practical purposes, short-term rates have already increased, so a rate hike has already de facto been effected.

Deposit rates

“Market funding rates have also moved Up. Typically, bank lending and deposit rates are the last to be impacted though some banks have started increasing deposit rates. RBI Deputy Governor Michael Patra seems to signal that RBI will hold policy rates a bit longer. My sense is that the RBI will remain on hold in April, till some of the global uncertainty abates. It will also wait to see how crude oil moves and gets passed on to pump prices, and then decide on a rate hike. Inflation is a concern but it doesn’t seem to be attaining the kind of stickiness in the developed economies,” he said.

But ICICI Securities in a report said that higher crude oil prices may push bring forward rate hikes.

“Brent crude prices are uncorrelated with headline CPI inflation in India (because fuel and light have only a 6.84 per cent weightage in the CPI), but a generalised surge in commodity prices will likely keep India’s CPI inflation above 6 per cent year on year in March to April 2022, nudging the RBI to raise the repo rate by 50 basis points in April to July 2022,” it said.

However, Patra had recently noted that India is in a comfortable position as far as inflation is concerned.

“And since that is there, we have the headroom to support growth and we will do so because we are dealing with lost output, lost livelihood…So, I think, it is an unfair judgment (that RBI is behind the curve). But RBI reserves the right chose its timing to normalise,” he had said.

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