Economists See 35 Basis Points Repo Hike In December As Retail Inflation Cools

As retail inflation cools, economists expect the Monetary Policy Committee to raise the repo rate by 35 basis points in December. A few even see a pause thereafter.

India's consumer price index-based inflation eased to three-month low of 6.77% in October, from 7.41% in September, according to official data released on Monday. But it's still above the Reserve Bank of India's tolerance band of 4% (+/-2%).

At the last policy meeting, the RBI had projected retail inflation at 6.5% in the third quarter ended December, 5.8% in the fourth, and 5% by the first quarter of the next fiscal.

So far in the ongoing tightening cycle, the MPC has hiked rates by 190 basis points. It is scheduled to release its policy statement on Dec. 7.

Inflation will moderate after the first quarter of 2023 as growth slows, according to a research note by Nomura that forecasts a 35-basis-point hike in December and a final 25 basis points in February for a terminal repo rate of 6.50%.

Nomura estimates India's headline inflation to moderate from 7% in the September quarter of 2022 to about 6.6% by October-December and 6.3% by January-March. This should further ease to 5% by April-June of 2023, it said.

"We believe the October inflation data will support further policy rate tightening," said Sonal Varma and Aurodeep Nandi, economists with Nomura. "Based on our view that growth signals will incrementally start worsening and given the current split within the MPC, there is a risk the RBI may deliver a final rate hike in December and then opt for a pause with the aim to achieve a soft landing."

The wedge between the wholesale price index and CPI inflation is now closing in, while core CPI inflation remains sticky. This suggests that as raw material prices abate, margin pressure for corporates should now turn into margin expansion with relatively sticky selling prices, Teresa John, economist with Nirmal Bang Institutional Equities, said in a note.

John expects CPI inflation to touch about 4% by March 2023. "We expect CPI inflation to average about 6.4% in FY23 versus 6.2% earlier, but below the RBI’s estimate of 6.7%," she said, adding that the MPC is likely to raise rates by about 35 basis points at the policy meeting in December followed by an extended pause.

The near-term inflation outlook remains clouded with uncertainties emanating from ongoing geopolitical tensions, global financial market volatility, and weather-related supply disruptions, according to Suvodeep Rakshit, senior economist with Kotak Institutional Equities.

"Keeping in view the domestic inflation trajectory, the possible Fed’s comfort of smaller rate hikes, and the possibility of a global slowdown over the next few quarters, we maintain our call for a 35 basis points repo rate hike in the December policy to 6.25%," said Rakshit. This will be followed "by a wait-and-watch stance to evaluate the impact of previous rate hikes, improving sowing patterns of wheat, seasonal fall in perishable food items, and spillovers from the global slowdown on the domestic economy", he said.

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