The Reserve Bank of India (RBI) is likely to opt for a modest 25 basis point (bps) repo rate increase in its bi-monthly monetary policy announcement on Wednesday as retail inflation shows indications of slowing down and the US Fed is easing the pace of increase in its benchmark interest rate. The Monetary Policy Committee (MPC) meeting of the RBI, which commenced on Monday, February 6, will conclude on Wednesday, February 8.
The central bank had raised the key rate by 35 basis points (bps) in the December policy after delivering three consecutive hikes of 50 bps.
What brokerages have to say
The MPC is anticipated to raise the interest rate by an additional 25 bps at the upcoming policy announcement in response to twin discomforts—a high core inflation rate and a strong CAD, believes Nuvama Wealth Management Ltd.
According to the brokerage, the Fed-led rate-tightening cycle will shortly reach a stop period, and the RBI may soon follow. Thus, rather than acting directly, the upcoming MPC decision is crucial from a guidance perspective (both rates and liquidity).
"Over the course of 2023, we expect CAD and inflation concerns to keep receding (as commodities/input price pressures ease) while downside risks to growth could escalate. Even on the fiscal front, while the budget gave a good capital expenditure (capex) push, the overall fiscal support to the economy is receding. Importantly, a couple of MPC members were calling for pause or a neutral stance at the last MPC review itself," said the brokerage in its report.
According to Nirmal Bang Equities Private Ltd, resilient high frequency indicators and continued rate hikes by global central banks may spur RBI action even as headline inflation has shown some signs of moderation.
"We expect the RBI to go for a final insurance rate hike of 25bps at its meeting on February 8. The MPC may take the view that resilient growth and sticky core inflation allows space for rate action to keep inflation expectations anchored. However, we also see chances of increasing dissent within the MPC and expect a change in stance to ‘neutral’ or at least a drop in the line ‘withdrawal of accommodation’. We expect the RBI to maintain liquidity at comfortable levels and also see a cut in the cash reserve ratio (CRR) by 50 bps if liquidity conditions tighten going forward, "said the brokerage in its report.