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MUMBAI: With credit growth continuing to race ahead much faster than deposits, the Reserve Bank of India is expected to hike rates by 25 basis points this week, its last hike for the current economic cycle. The central bank would also need to hike rates to keep up with global central banks as the US Fed, the European Central Bank and the Bank of England all raised interest rates last month.
Last month RBI governor Shaktianta Das hinted at policy pivot with rates plateauing. “Central banks have started what appears to be a pivot towards lower rate hikes or pauses. At the same time, they continue to emphatically reiterate their resolve to bring inflation down closer to targets. High policy rates for a longer duration appear to be a distinct possibility going forward,” Das said speaking at the bond dealers conference in Dubai on January 27. The governor will announce the Monetary Policy Committee decision on rates on February 8.
According to Madan Sabnavis, chief economist, Bank of Baroda, the monetary policy committee would persist with another rate hike to bring the repo rate to 6.5% (from 6.25% at present) for this cycle before a pause. The government’s decision to stick with fiscal consolidation will make the MPC’s task easier. “The government borrowing programme is unlikely to pressurize liquidity in an unusual manner as it has been retained at the FY 23 level. Deposits growth should get better which should add to liquidity. With the economy slowing down growth in credit would also tend to be moderated to a lower level of around 11-13% in FY24,” said Sabnavis.
The year-on-year growth in bank credit is 16.5% as against 10% for bank deposits.
In the past RBI has said that its rate hikes will take a few quarters to have an impact. However, a 25-basis point hike is seen as a certainty as its target of 4% is still far with December inflation coming in at 5.72%. “With the 4% target not in sight, we expect the RBI to hike rates by 25bp in the upcoming policy meeting, taking the repo rate to 6.5%. With growth slowing, we expect no future rate hikes (although risks remain). And because core inflation will likely remain elevated, we expect no rate cuts either in FY24,” said Pranjul Bhandari, chief economist India, HSBC.
Rahul Bajoria, economist with Barclays concurs with the view that the MPC will hike rates by 25 basis points and that this would be last hike in this cycle. “We also think it is likely that the policy stance will be changed to neutral, where it was last in December 2018, when the repo was 6.50%. Furthermore, inflation has begun to moderate and appears set to drop further in coming months,” said Bajoria.
Last month RBI governor Shaktianta Das hinted at policy pivot with rates plateauing. “Central banks have started what appears to be a pivot towards lower rate hikes or pauses. At the same time, they continue to emphatically reiterate their resolve to bring inflation down closer to targets. High policy rates for a longer duration appear to be a distinct possibility going forward,” Das said speaking at the bond dealers conference in Dubai on January 27. The governor will announce the Monetary Policy Committee decision on rates on February 8.
According to Madan Sabnavis, chief economist, Bank of Baroda, the monetary policy committee would persist with another rate hike to bring the repo rate to 6.5% (from 6.25% at present) for this cycle before a pause. The government’s decision to stick with fiscal consolidation will make the MPC’s task easier. “The government borrowing programme is unlikely to pressurize liquidity in an unusual manner as it has been retained at the FY 23 level. Deposits growth should get better which should add to liquidity. With the economy slowing down growth in credit would also tend to be moderated to a lower level of around 11-13% in FY24,” said Sabnavis.
The year-on-year growth in bank credit is 16.5% as against 10% for bank deposits.
In the past RBI has said that its rate hikes will take a few quarters to have an impact. However, a 25-basis point hike is seen as a certainty as its target of 4% is still far with December inflation coming in at 5.72%. “With the 4% target not in sight, we expect the RBI to hike rates by 25bp in the upcoming policy meeting, taking the repo rate to 6.5%. With growth slowing, we expect no future rate hikes (although risks remain). And because core inflation will likely remain elevated, we expect no rate cuts either in FY24,” said Pranjul Bhandari, chief economist India, HSBC.
Rahul Bajoria, economist with Barclays concurs with the view that the MPC will hike rates by 25 basis points and that this would be last hike in this cycle. “We also think it is likely that the policy stance will be changed to neutral, where it was last in December 2018, when the repo was 6.50%. Furthermore, inflation has begun to moderate and appears set to drop further in coming months,” said Bajoria.
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