RBI MPC’s 3-Day Meeting Starts; Analysts Expect Rate Hike Of Lower Magnitude At 35 bps

Amid the retail inflation in the country remaining above 6 per cent for 10 months in a row, the Reserve Bank of India’s (RBI) Monetary Policy Committee is starting its three-day meeting today (Monday) to deliberate on the rate hike decision. The meeting comes after four back-to-back repo rate hikes (190 basis points in total) by the RBI’s rate-setting panel since May 2022 to control inflation. Analysts said the RBI will raise the key repo rate this time also, but the magnitude will be lower between 25 bps and 35 bps.

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The six-member RBI MPC’s meeting will continue between Monday (December 5) and Wednesday (December 7), and the policy rate action will be announced on the last day of the meeting (Wednesday). The central bank has a target of keeping inflation at 4 per cent, with a flexible band of +- 2 per cent.

In the last monetary policy review, the RBI MPC had raised the policy repo rate under the liquidity adjustment facility (LAF) by 50 basis points to 5.90 per cent. RBI Governor Shaktikanta Das, in according to the minutes of the meeting, had said the monetary policy needs to remain watchful and nimble, based on incoming data and evolving conditions. “We should remain vigilant on the inflation front while strengthening our macroeconomic fundamentals.”

India’s retail inflation in October eased to a three-month low of 6.77 per cent. However, it was the 10th month in a row that the Consumer Price Index (CPI)-based inflation remained above the RBI’s upper tolerance limit of 6 per cent. In September, India’s retail inflation had accelerated to a five-month high of 7.41 per cent. Before that, the retail inflation had stood at 7.04 per cent in May, 7.01 per cent in June, 6.71 per cent in July, and 7 per cent in August.

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The RBI’s Monetary Policy Committee last month (November 4) met to discuss and draft a report for the government on why the central bank has failed to keep retail inflation below the target of 6 per cent for three consecutive quarters since January this year.

Rate Hike Expectations

Most economists and analysts expect the rate hikes to continue but with a lesser magnitude than the 50 basis points earlier. Industry body Assocham in its letter to RBI Governor Shaktikanta Das also urged to moderate interest rate hikes in order to ensure that the rising cost of borrowing does not have an adverse and disproportionate impact on nascent economic recovery.

In its letter, Assocham said the new rate hike should not exceed the 25-35 basis points.

Stating that the RBI will be presenting the monetary policy against the backdrop of GDP growth slowing down as well as inflation being high above 6 per cent, Bank of Baroda Chief Economist Madan Sabnavis said the MPC is expected to continue with rate hikes this time though the magnitude will be lower — probably 25-35 bps.

ICRA Chief Economist Aditi Nayar said that with the CPI inflation remaining solidly above the MPC’s 6 per cent tolerance level in October 2022, another rate hike is certain in the December 2022 policy. “However, its size is likely to be tempered to 35 bps, from the 50 bps seen in the last three reviews, given the moderation in CPI inflation in Oct 2022 and the expectations of a further dip in November 2022.”

India Ratings Principal Economist Sunil Sinha said the central bank has front-loaded monetary tightening and the chances of further rate hikes would be more data-dependent. “The frequency and magnitude of rate hikes is expected to decline. We expect a status quo or at best a 25bp rate hike in December 2022 monetary policy.”

The RBI has raised the key repo rate by 190 basis points since May this year. In May, the central bank conducted its off-cycle monetary policy review to hike the repo rate by 40 bps to control inflation.

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