RBI Monetary Policy Review: Will Central Bank Announce Repo Rate Hike Tomorrow? Know What's Expected

The RBI Monetary Policy Committee panel may opt for a smaller 25 basis points repo rate hike when the outcome is announced on Wednesday as the retail inflation has shown signs of moderation

The RBI is battling to ensure that retail inflation remains at 4 per cent with a margin of 2 per cent.

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The Reserve Bank of India (RBI) rate-setting panel Monetary Policy Committee (MPC) may opt for a smaller 25 basis points repo rate hike when the outcome of the three-day review is announced on Wednesday. The six-member RBI panel commenced its monetary policy review on Monday after the Union Budget 2023 was presented by Finance Minister Nirmala Sitharam last week that aimed at pushing growth.

Experts believe that the central bank may only opt for a 25 basis points hike in the key interest rate as the retail inflation has shown signs of moderation and remains below the RBI's 6 per cent upper tolerance level besides the projected slowdown in GDP growth in the next fiscal starting April, reported news agency PTI.

Madan Sabnavis, chief economist at Bank of Baroda, told the agency that the Budget has maintained a virtually unchanged borrowing programme while the Survey has pointed to the persistence of higher interest rates in the coming year.

Even as inflation has seen a downtrend, there has been a tendency for core inflation to remain sticky. "Inflation has come down mainly due to lower food inflation which can be volatile. Also, the decision taken this time cannot be reversed soon," Sabnavis said. "Under these conditions, the RBI will pitch for another 25 bps hike in the repo rate which will be the last in this cycle, and then pause. The stance however may change from the withdrawal of accommodation to neutral as liquidity is no longer in a large surplus. In fact, based on developments that take place, there may be a need to infuse liquidity during the course of the year," Sabnavis told PTI.

A report from Kotak Institutional Equities said the global inflation environment is slowly turning benign even as it pointed out that inflation is still well above every central bank’s target. Inflation will likely moderate further in the next few months, leading to the end of the rate hiking cycle by first half of 2023 and possible rate cuts in late-2023/early-2024, the report noted, according to the PTI.

“We expect the RBI MPC to hike policy rate by 25 bps to 6.5 per cent, followed by a prolonged wait-and-watch approach, as it assesses the lagged impact of monetary tightening on growth and inflation,” it said.

“RBI will probably stick to a moderate increase in its benchmark lending rate in the upcoming policy announcement, before hitting a pause button on hikes later in 2023," said Dhruv Agarwala, Group CEO, Housing.com on MPC expectations.

The RBI is battling to ensure that retail inflation remains at 4 per cent with a margin of 2 per cent. However, it couldn’t maintain the inflation rate below six per cent for three consecutive quarters beginning January 2022. Even as retail inflation based on the Consumer Price Index (CPI) has shown signs of moderation in November and December, it fell below the RBI's upper tolerance level of 6 per cent.

Meanwhile, a separate report by SBI economists said the RBI may also press the pause button on rate hike. "We expect the RBI to pause in February policy," State Bank of India's Economic Research Department said in a report titled 'Prelude to MPC Meeting on February 6-8, 2023', according to the PTI report.

The report said that in the current rate cycle, rate actions including hikes, and cuts are largely synchronised with actions of the monetary authorities in the developed nations. The stance, the SBI report said could continue to be withdrawal of accommodation, even as liquidity is close to neutral, as per the report. "Even though the RBI could pause as it allows past rate actions to work with long and variable lags, the RBI could still guide the markets with a rate action in the future that will be purely data dependent," it said.

The report pointed out that 6.25 per cent repo rate could be the terminal rate for now. In its December monetary policy review, the central bank raised the key benchmark interest rate (repo) by 35 basis points (bps) after delivering three back-to-back increases of 50 bps.