It is unlikely that the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) will pause the rate hikes on December 7 even though there are signs that retail inflation might have peaked and the US Fed may raise rates on a slower pace.
The RBI MPC meet started on December 5 and when RBI Governor Shaktikanta Das announces the committee's decision on December 7, investors' focus will be on the forecast for inflation and growth.
India's latest macroeconomic prints such as GDP numbers, auto sales numbers, GST collections and PMI data are indicating that the rate hikes so far did not have a material impact on the economy.
This will allow the central bank headroom to continue with the rate hikes since inflation remains above the RBI's tolerance band of 6 percent.
Let's take a look at what analysts and brokerage firms expect on RBI MPC outcome
Suvodeep Rakshit, Chief Economist, Kotak Institutional Equities
The RBI’s December policy meeting will likely see the MPC hiking the repo rate by 35 bps lower than the last three hikes of 50 bps. However, the decision is unlikely to be unanimous.
The domestic inflation trajectory while remaining above the upper limit of the RBI’s inflation target band is gradually moderating.
Domestic demand remains steady though risks of a global demand slowdown are increasing which is likely to impinge on India’s growth.
The external sector situation remains uncertain. Inflation in most developed economies remains elevated but showing signs of peaking.
The US Fed has not been surprised with a more-than-expected hawkish statement along with indications of a slower pace of hikes.
Commodity prices have also come off, and the recent fall in crude prices is also encouraging though uncertain whether it will sustained.
These factors will provide some confidence to the RBI in slowing the pace of rate hikes and, possibly, pausing soon to assess the impact of the past rate hikes.
However, more recently, sticky core inflation, higher cereal prices, and increasing food inflation will keep the RBI cautious.
A 35 bps hike will signal a mix of cautiousness and comfort while keeping all options open (including a pause or a smaller hike) for the February policy depending on the conditions.
Churchill Bhatt, Executive Vice President & Debt Fund Manager, Kotak Mahindra Life Insurance Company
We are witnessing early signs of peaking inflation as a result of the sharp monetary tightening witnessed in the recent past.
Since monetary policy acts with a lag, the monetary policy committee (MPC) may want to take a bit of a breather in its fight against inflation to assess the impact of past policy actions.
The upcoming policy meeting may see only a 25 bps policy rate hike in light of the above.
The MPC may also hint at the likelihood of a subsequent pause in monetary tightening, especially if CPI inflation continues its downward trajectory in the coming months.
However, a pause in policy tightening, if any, should not be interpreted as a promise of a Pivot just yet.
Brokerage firm: Nuvama Wealth Management (formerly Edelweiss Securities)
After a series of 50bp hikes throughout the year, a 30-35bp rate hike is likely on RBI’s mind at its upcoming MPC meeting.
"The rationale, in our view, will be factors such as (i) Inflation, elevated still, has moderated from its peak; commodity prices eased too. (ii) US Fed has hinted at tempering its pace of rate hikes; the rupee presently is also stable. (iii) Global economy slackening, making room for vagaries in domestic growth," said the brokerage firm.
With this, the fag end of the tightening cycle seems to be approaching. The brokerage firm thinks that the global liquidity, price and demand cycles are reversing and this will hurt not just India’s exports, but may also bruise domestic credit/Capex cycles. Any rebound in energy/ commodities (China re-opening) poses an upside risk to the rating outlook.
Can the central bank upset the market?
There are two factors that can disappoint the market- firstly, if the RBI raises the repo rate by more than 50 bps, and second, if the central bank revises inflation targets significantly upwards and growth targets downwards.
The possibility of both look weak, experts pointed out, as the economy looks on track with government and private sector Capex expected to rise further.
Brokerage firm ICICI Securities believes that combined Capex (listed corporates plus government) is on track to exceed ₹21 lakh crore in FY23 alongside a robust real estate and credit cycle.
Inflation, too, is likely to moderate as seen in the global commodity prices.
"Incremental momentum in inflation is showing signs of moderation owing to falling commodity prices amidst global growth slowdown. Hence, the MPC focus can shift to assessing the lagged impact of past policy actions. We expect a 25 bps in the coming policy and a data-dependent stance in the future,” said Radhavi Deshpande, Joint President and Chief Investment Officer, Kotak Mahindra Life Insurance Company.
"Having orchestrated a little more than two and a half percent move in the overnight operative rate through policy rate hikes and liquidity unwind measures, the monetary policy committee (MPC) can now afford to embark on baby steps from here on," said Deshpande.
The forward-looking may have discounted a rate hike in the range of 25-35 bps. An in-line rate hike will have no major effect on the market. If the RBI signals that it is getting ready for a pause on rate hikes in the near future, it will be a major boost to the market sentiment.
Disclaimer: The views and recommendations given in this article are those of individual analysts and broking firms. These do not represent the views of MintGenie.