RBI Monetary Policy: The Rate Hike Cycle Is Nearing An End, Say Economists

While the Monetary Policy Committee's decision to hike the benchmark repo rate by 35 basis points was in line with expectations, amid easing of inflation and rising global headwinds, the RBI may go easy on raising rates further, according to economists.

"We retain our earlier expressed view of terminal repo being 6.25–6.50%," said Suyash Choudhary, head of fixed income at IDFC Asset Management Co., in a note.

In today's context, he said, "While we recognise that there are no explicit signals that the cycle is nearing its end, we aren't certain that another hike will be forthcoming in the February policy."

To be specific, there are no longer any "pre-programmed" biases for further rate hikes among the majority of the MPC members, he said.

According to him, further calibrated action being warranted refers to the need prior to this 35 bps action and doesn’t constitute guidance for further rate hikes in the future.

Watch | Crisil's Dharmakirti Joshi and Kotak's Lakshmi Iyer discuss the MPC policy

Despite having raised the effective policy rate by almost 290 basis points in just over six months, the governor emphasised the need for the fight against inflation to continue, said Rahul Bajoria, chief economist at Barclays.

"Amid the outlook for continued robust growth and as global commodity prices, especially crude oil, recede, we believe CPI inflation is set to moderate into the RBI target range soon," he said. "But given the RBI’s emphasis on pushing towards lowering core CPI inflation and the headline down towards 4%, we now expect a further 25 bps hike in February, taking the repo rate to 6.50%."

Although the rate tightening cycle continues, a pause could be near as there has been a step down in monetary policy aggression, as indicated by some MPC members exhibiting shades of dovishness, according to QuantEco Research.

The economy is now operating close to the steady state neutral rate, and the record pace of effective monetary tightening calls for an impact assessment amid changing money market conditions and a pickup in household leverage, it said.  

"We now expect the central bank to move quickly, opting for another 25 basis point hike in February 2023 and considering a pause thereafter," the economists Shubhada Rao, Vivek Kumar and Yuvika Singhal wrote in a note