RBI Signals Clear Focus On Inflation With Front-Loaded Rate Hikes, Say Economists
Economists see the rate hiking cycle continue with the repo rate seen at 6% by early-to-mid 2023.
The Monetary Policy Committee's decision to raise the repo rate by 50 basis points, a month after it hiked the benchmark rate by 40 basis points, signals a clear focus on inflation control, said economists in response to the June policy review.
Following the review, the benchmark repo rate has been raised to 4.9%.
Alongside, the hike in the repo rate, the MPC adjusted its resolution to signal its resolve to bring down inflation. The committee "decided to remain focused on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth", the resolution said, dropping a previous intent to remain accommodative.
Economists expect rate hikes to continue in the months ahead, with the repo rate moving closer toward 6% by early-to-mid 2023.
Pranjul Bhandari, HSBC
Continue to expect a series of rate hikes from here on, taking the repo rate to 5.5% by December 2022 and to 6% by mid-2023.
Our medium-term inflation forecast is 5.5%, and a 6% repo rate will imply a 0.5% real repo rate, close to our estimate of 0.5-1% neutral real rates for the economy.
High currency in circulation and the RBI’s forex interventions will continue to drain domestic liquidity.
In order to reach its estimate of non-inflationary liquidity surplus (of about Rs 2.5 lakh crore), the RBI may also deliver another 0.5% CRR hike later in the year.
The growth recovery is strong currently, and the economy is likely to digest a series of rate hikes relatively easily. No use delaying or taking breaks.Pranjul Bhandari, Chief India Economist, HSBC
Rahul Bajora, Barclays
If the inflation outlook does not improve and downside growth risks do not rise materially, the RBI will likely continue on its rate hiking trajectory.
Over the next three meetings (August, October, and December), we expect the RBI to make inflation management its key priority, which could include steps to curb aggregate demand.
In terms of sequencing, we now expect the RBI to deliver a 35-basis-point rate hike in August, and then raise the policy rate by 25 basis points to 5.50% in October.
Beyond that, we expect the RBI to deliver one more rate hike in December to 5.75%, which we now believe will mark the end of this cycle.
The RBI revised up its inflation forecasts, but kept its growth projections. This signals its intention to keep inflation at the centre of its decision making, and desire to return to the pre-Covid policy stance as soon as it can.Rahul Bajoria, Chief India Economist, Barclays
DK Joshi, Crisil
MPC has hiked rates by 90 basis points cumulatively since May. A sharp rise in inflation outlook is forcing Mint Road’s hand.
The RBI foresees inflation staying above 6% in the first three quarters of this fiscal, amounting to four straight quarters of above-target reading. If the barometer stays above target for three consecutive quarters, the RBI is obliged to explain to the government.
A series of shocks—primarily exogenous—starting with the Russia-Ukraine conflict and the recent abnormal heatwave in parts of the country, have been driving up prices.
The heatwave has worsened the outlook on food inflation because of its adverse impact on the production of critical items such wheat and vegetables. While another spell of normal monsoon is expected to ease prices in the second half, its intensity and distribution bears watching.
The RBI’s policy tightening is also warranted to reduce pressure on the rupee from widening the current account deficit and stem foreign portfolio outflows.
We expect the RBI to increase the repo rate by another 75 bps this fiscal, and take it 50 bps above the pre-pandemic level. This will not, however, hit growth in the current fiscal because as monetary policy impacts the real economy with a lag. We expect that to play out beginning the last quarter of this fiscal and to a greater extent next fiscal.DK Joshi, Chief Economist, CRISIL