Cooling Prices Give Reserve Bank Space To Slow Pace Of Interest Rate Hikes

Governor Shaktikanta Das will announce the rate decision on Wednesday at 10 am

While most economists expect the RBI to go for another rate hike in February, JPMorgan Chase and Co.’s Sajjid Chinoy said December’s 35 basis points hike could be the last in the cycle.

The Reserve Bank of India (RBI) will start slowing the pace of interest rate hikes on Wednesday, thus signalling it’s near the end of its aggressive tightening cycle, as reported by Bloomberg.

The central bank's six-member Monetary Policy Committee (MPC), led by Governor Shaktikanta Das, has raised interest rates by 190 basis points this year, including three half-point moves. This has led to smaller increments: inflation is coming off a high and headwinds to economic growth are increasing.

Of 35 economists, 29 economists in a Bloomberg survey predict the benchmark repurchase rate will be raised by 35 basis points, three see a quarter-point move, while one each expect a 10-, 30-, and 50-basis-point action.

The governor will announce the rate decision on Wednesday at 10 am. According to the report, analysts will be keenly watching for any hints of the beginning of the end of the rate hike cycle.

US Federal Reserve Chair Jerome Powell has already signalled a down-shift, a source of comfort for Indian policymakers.

Bond market traders, in particular, would interpret a dovish tone as a clear sign of rates peaking. Falling commodity prices and dampening demand may provide reprieve.

“The pace of rate hikes will be tempered as external headwinds have eased considerably after the recent sell-off in the dollar, oil prices, and the US Fed’s expected pivot to smaller rate hikes,” said Dhiraj Nim, economist at ANZ Group. It would be crucial to scrutinize the language of the monetary policy committee’s stance as both “nominal and real policy rates are now entering growth restrictive territory.”

While most economists expect the RBI to go for another rate hike in February, JPMorgan Chase and Co.’s Sajjid Chinoy said December’s 35 basis points hike could be the last in the cycle. However, others feel a change in stance may offer the RBI flexibility to calibrate its actions depending on the incoming data. "We expect a unanimous MPC vote to change the policy stance to neutral from accommodation," said Abhishek Gupta of Bloomberg Economics.

The governor’s view on the growth-inflation trade-off will also be closely tracked, especially after Finance Minister Nirmala Sitharaman, said economic expansion was the top priority for the government now.

Global headwinds will be a key risk for next year’s growth outlook, said Kaushik Das of Deutsche Bank AG, adding that he doesn’t expect that rate hikes to continue beyond the December policy. The bank expects the RBI to keep its inflation and growth forecasts unchanged at 6.7 per cent and 7 per cent, respectively, for the fiscal year ending March.

Meanwhile, India’s foreign exchange (Forex) reserves have climbed over $20 billion in the last three weeks to $550.14 billion as of November 25, giving the RBI more control over the exchange rate. The rupee saw its first monthly gain this year in November.

In another instance, the World Bank, in its latest report on Tuesday stated that India's Gross Domestic Product (GDP) growth is expected to grow 6.9 per cent in the current fiscal year (FY23).