The hike in the repo rate by another 50 bps and maintaining the stance of “withdrawal of accommodation” are on the expected lines.

The RBI commentary has been a balanced one — while global risks have been taken into account, the central bank appears confident of the growth momentum. The modest downward revision in GDP growth forecasts for FY23 — from 7.2 per cent to 7.0 per cent now.

India’s consumer confidence index (CCI) — an important indicator given the near two-third share of private consumption in the economy — strengthened during 2022.

Inflation path

On the other hand, inflation, while having peaked during the July-September quarter and is projected to come down within the RBI’s tolerance band, remains discernibly high for the central bank’s comfort. The MPC’s guidance suggests future policy action to remain data-dependent. Against that backdrop, given persisting inflationary pressures in the global arena and a host of central banks tightening materially, another round of rate hike by the RBI cannot be ruled out. However, one feels that we are towards the final lap of tightening, which may get over by 2022.

Against the current global scenario of rate hikes, the RBI has also clearly chosen to stay “cautious, nimble-footed and calibrated” in its monetary policy. Even if the current approach means a somewhat slower recovery, the central bank stays focused on financial stability and long-term growth sustainability.

In the context of deciding on the terminal policy rate, a factor will likely be the share of assets books of the banking system that reflects external benchmark linked rates (EBLR) — at nearly 50 per cent now as against a tiny single-digit number in the previous hiking cycles — which is witnessing nearly instantaneous and complete pass-through of the central bank’s rate signals.

Rate hike cycle

Thus, incoming data on the evolving growth-inflation dynamics both at home and abroad, and the external sector situation will play a key role in determining the MPC’s bias in the coming months as well. Our baseline expectation is that, barring further unforeseen surprises, the repo rate may peak in the 6.25-6.50 per cent zone towards the end of the year.

This is a tad higher than what one would have expected a few months back for the terminal repo rate to reach in the current cycle. However, with inflation persisting globally and central banks hiking aggressively, market expectations have aligned largely to the new scenario.

The writer is Chief Economist & Head of Research in Bandhan Bank. Jamal Shahid provided assistance to this article. Views expressed are personal

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