At least now investors should stop feeling surprised over RBI's off-cycle rate hike in May as the central bank has indicated what transpired in the background before the RBI governor announced the 40 bps rate hike.
Just a month ago in April, RBI said that the rate hikes will be gradually done in a way that does not derail the economic recovery. Now, keeping inflation under control is the top priority of the central bank.
Inflation has emerged as one of the biggest worries for policymakers across the globe. In the US, UK and India, inflation is at a multi-year high level. The ongoing Ukraine war, which nobody knows when it will end, has triggered a sharp upswing in crude oil and other commodity prices. Inflation is bad for investors as it eats up their disposable income and hit the companies too by raising their input costs and eroding margins.
The RBI MPC minutes confirmed that the MPC’s inter-meeting hike was compelled by the surprisingly high March
inflation outcome, and its reassessment of the inflation outlook - leading it to play policy catch-up, brokerage firm Emkay Global Financial Services highlighted.
"Although the economic outlook is being impacted by huge crosscurrents and shifts - the net impact of which
is still hard to gauge – the overall RBI rhetoric has moved in a hawkish direction. With the reaction function pivoting back toward inflation over growth as a policy priority, the bias is clear," Emkay Global added.
Be ready for aggressive rate hikes
The RBI has little room to sit and wait. Inflation is expected to remain elevated in the next few months also and RBI would want to stay ahead of the curve. The US Fed Chair Jerome Powell has already stated that Federal Reserve will keep raising rates until it brings inflation under control.
Owing to soaring commodity prices, supply-chain shocks and resilient growth, the focus has shifted to inflation containment.
"The RBI no longer thinks the output sacrifice required to contain somewhat supply-driven inflation can be so high, on the net. The reaction function is now evolving with fluid macro realities. The inflation prints of the next two quarters are also likely to exceed 6 percent, which could pressure the RBI into acting sooner rather than later," Emkay said.
"We are tracking next month’s inflation at 6.8 percent, and this may push the MPC to hike by another 25bps-50bps in June. FY23 could thus further see rates going up by 100-125bps, with the RBI now showing its intent to keep real rates neutral or above to quickly reach pre-Covid levels," the brokerage firm added.
Emkay Global, however, believes that the front-loaded rate-hiking cycle may not imply a lengthy tightening cycle, and once the RBI reaches the supposed neutral pre-Covid monetary conditions, the bar for further tightening incrementally may be higher amid increasing growth-inflation trade-offs.
Aditi Nayar, Chief Economist, ICRA, expects the MPC to hike the repo rate by a further 40 bps in the June review and 35 bps in the August review. That will revert us to the pre-pandemic level of the repo rate and help to prevent inflationary expectations from getting unanchored.
"After that, we expect a pause to see the impact of the rate hikes on economic growth. We foresee a terminal rate of 5.5 percent by mid-2023. Overtightening is not warranted in the current circumstances as inflation is being fuelled by global supply side factors, and may needlessly sacrifice domestic growth and sentiment,” said Nayar.
Kotak Securities highlighted that the MPC members highlighted concerns of spillovers from global inflation emanating from ongoing geopolitical conflicts and supply-side disruptions. Members acknowledged the need for reasonable policy actions to tame inflation while expressing relief over relatively better growth prospects.
"Even as we retain our base case repo rate hike of 40 bps (along with a 50 bps CRR hike) in the upcoming June policy, we do not rule out an outside chance of 50 bps hike given the need towards the conventional moves of multiples of 25 bps. Overall, we pencil in cumulatively further repo rate hikes of 110-135 bps by end-FY23," said Kotak Securities.
Disclaimer: The views and recommendations made above are those of individual analysts or broking firms and not of MintGenie.
