scorecardresearchRBI likely to hit the 'pause button' on interest rate hikes; here’s what

RBI likely to hit the 'pause button' on interest rate hikes; here’s what analysts have to say

Updated: 05 Jun 2023, 04:15 PM IST

Analysts predict the Central Bank to maintain the policy repo rate of 6.5% at its upcoming Monetary Policy Committee meeting on June 08, 2023, due to the lowering of the retail inflation rate.

Experts anticipate a pause in repo rate hikes by RBI

Experts anticipate a pause in repo rate hikes by RBI

Personal finance analysts are assuming that the country’s Central Bank may pause its policy repo rate at 6.5 per cent during its announcement on June 08, 2023. The expectation is much in line with the easing of the retail inflation rate in April this year. Analysts also estimate a likelihood of further decline, thus, highlighting the efficiency of prior policy rate actions.

The next Monetary Policy Committee (MPC) meeting is slated to be held from June 06, 2023 to June 08, 2023. However, the decision would be announced on June 08, 2023, after much deliberation by the six-member committee.

Ashwani Dhanawat, Chief Investment Officer, Shriram General Insurance shared, “RBI MPC in its previous meeting voted for a “pause”, while preserving the same monetary policy stance that was focused on the withdrawal of accommodation, validated our minority view on the street.”

“The GDP growth for Q4 of 2022-23 came at 6.1% Y-o-Y versus 4.5% Y-o-Y in Q3 of FY 2022-23 was higher than the expectation. The growth recovery was led by the services sector, in particular ‘trade hotels and transportation’ and ‘real estate and financial services’. Y-o-Y manufacturing sector growth of 4.5% reflects an improvement in corporate profits with a reduction in margin pressures,” added Dhanawat.

Post the last MPC meeting in April this year, the RBI in a surprisingly positive move paused its rate hike cycle, thus, bringing a halt to the continued interest rate hikes. The pause was a major reprieve from the cumulative repo rate hikes by 250 basis points since May 2022 to control inflation.

Viral Bhatt, Founder, Money Mantra said, “I think the RBI is likely to keep the repo rate unchanged at 6.5% in its upcoming June 8 announcement. The RBI has been raising the repo rate in recent months in an effort to control inflation, which has been rising due to global supply chain disruptions and the Russia-Ukraine war. However, inflation has started to show signs of easing, and the RBI may be reluctant to raise rates further for fear of hurting economic growth.”

Inflation has a marked effect on repo rate hikes, which is evident from the RBI’s decision to hike or lower down interest rates. When reaching its decision, the RBI is likely to take into account a number of variables, such as the most recent inflation figures, the projections for economic growth, and the activity in the financial markets. The RBI might be more inclined to leave the repo rate constant if inflation continues to decline. The RBI might have to increase rates higher, though, if inflation starts to increase once more.

Dev Ashish, a SEBI-Registered Investment Advisor and Founder (Stable Investor) said, “RBI is expected to keep the rates unchanged in this meet as well as the retail inflation is easing, thereby, proving the effectiveness of all the previous rate hikes aggregating to 2.5%. Also, the banking system is flush with liquidity with RBI making a larger-than-budgeted surplus dividend transfer as well as an increase in deposits with banks due to the withdrawal of 2000 notes banknotes. So the pause continues and without major unexpected events, it may also lead to a downward reversal of rates later in the year.”

The RBI has been instructed by the government to maintain CPI inflation at four per cent with a two per cent tolerance on either side. Many bankers are also anticipating that the central bank will maintain its policy halt going forward.

Bhatt adds how the RBI’s decision regarding policy rate hikes depends on myriad variables including:

Inflation: The RBI's primary goal is to keep inflation under control. If inflation continues to rise, the RBI may be forced to raise rates further.

Economic growth: The RBI also wants to ensure that economic growth is not hurt by higher interest rates. If economic growth starts to slow down, the RBI may be more reluctant to raise rates.

Financial markets: The RBI will also consider the impact of higher interest rates on the financial markets. If higher interest rates lead to a sell-off in the stock market or a rise in bond yields, the RBI may be more reluctant to raise rates.

More than the pause, the markets are hoping for some rate cuts. However, a lot depends on how the RBI decides to manage its liquidity, given the recent influx of 2000 notes into the banking system.


Investments to beat inflation
First Published: 05 Jun 2023, 04:15 PM IST