RBI Monetary Policy: Is This The Last Hike Of The Cycle? Here's What Economists Say

India's Monetary Policy Committee has hiked the repo rate by 25 basis points, bringing the benchmark rate to its highest level since 2018 even as it retained its stance.

While the move was in line with expectations, the central bank's inflation outlook was mixed, with RBI Governor Shaktikanta Das cautioning against risks from the global commodity price outlook. "Stickiness of the core" or "underlying inflation" is a matter of concern, he said. The commentary has left economists divided over the future of the central bank's rate hike trajectory.

It was a close call in the current round to choose between a pause and a 25 basis point hike, as reflected in the MPC voting pattern, with two of the six-member committee voting for a pause, said Siddhartha Sanyal, chief economist and head of research at Bandhan Bank. While the voting pattern turned more diverse than usual, it is clear that the MPC’s action will be more dependent on data—both domestic and global—in the coming months, he said.

The RBI will likely stay in search of more decisive signs of sustained disinflation in the coming months. On the other hand, if inflation indeed continues to soften in line with the RBI’s current expectation, the MPC will likely feel more comfortable moving into a long pause in the next quarter, according to Sanyal.

As in test cricket, the key question is whether the RBI is now set to declare an innings on its rate hike cycle, said Aurodeep Nandi, India economist and vice president at Nomura. The current rate hike of 25 basis points was in line with expectations, although we believe that the time is ripe for a change of stance to ‘neutral’ from the withdrawal of accommodation," Nandi said.

As such, the RBI Governor’s communication struck a somewhat hawkish note, flagging concerns on high core inflation, projecting headline inflation at 5.3% for FY24, projecting confidence on growth, and flagging that monetary policy conditions are still not as tight as pre-pandemic levels – which doesn’t bolt the door completely on further tightening, he said.

While this is appropriate posturing at a time of elevated global risks, the policy arithmetic has changed from "de facto" policy tightening to a distinctly data-dependent mode, according to Nandi, who expects a pause hereon.

The policy was well balanced, with the focus remaining on the removal of accommodations, said Indranil Pan, chief economist at Yes Bank.

"Inflection points are always difficult to call, but I think that the rate-hiking cycle of the RBI may yet not be over. We remain open to another 25 basis point increase in the repo rate in April or even later and will critically depend on the inflation prints in the months ahead," said Pan. For record, our model suggests that the next CPI print can surprise on the higher side to 6.2-6.4%, as food prices are seen to have largely normalized based on data obtained from the Department of Consumer Affairs, he added.

While we are expecting no more rate hikes in FY24, we do not expect any rate cuts either, said Pranjul Bhandari, chief India economist at HSBC. Inflation is likely to moderate but the 4% inflation target is not in sight. Core inflation remains elevated due to several structural changes such as more pricing power with large firms, adverse climate events keeping food prices volatile and permanently raising inflation expectations, and a host of import tariff increases raising the cost structure of the economy, she said.

As such, we’re likely to be in a period of high for longer, according to Bhandari.