Nine out of 10 banks polled by ET expect the central bank to hike rates by 35 basis points – 0.35 of a percentage point – or less at the December 5-7 meeting of the monetary policy committee (MPC). While five of the nine predict a rate increase of 35 bps, two expect it will be in a range of 25-35 bps, another two project a 25 bps hike. The only forecast outside this is for the RBI to continue with a half-percentage-point increase this time as well.
“With the Fed indicating its desire to slow down the pace of rate hikes to 50 bps clips and the October US CPI momentum easing relative to expectations, thereby reducing the depreciation pressure on the rupee, we think the monetary policy committee will be comfortable to dial down the pace of rate hikes to 35 bps in December,” said Kaushik Das, Deutsche Bank’s chief India economist.
The RBI has raised the policy repo rate, at which it lends money to commercial banks, by 190 bps since it started hiking rates with an off-cycle 40 bps increase in May. The three rate hikes since have each been of 50 bps, taking the benchmark repo rate to 5.90%, even as consumer inflation remained stubbornly above the upper end of the RBI’s 6% target amid a rise in food and fuel prices. The RBI also had to match the fastest pace of rate increases by the US Federal Reserve in nearly 30 years – the Fed has raised its policy rate from near zero in March to a range of 3.75% to 4%.
Both these pressure points are easing with domestic inflation likely to slow down closer to 6% and Federal Reserve chairman Jerome Powell saying the US could slow the pace of its rate increases.
“We continue to expect headline inflation to moderate from 6.8% registered in October towards 5-5.5% in FY24. We expect the MPC’s policy outlook to be data dependent, contingent upon Fed action, inflation trajectory and financial stability,” economists at UBS Securities said in a note, while predicting a 25-35 bps increase.
Bankers said challenges to India’s growth due to a likely global slowdown would also weigh on the central bank, forcing it to calibrate its hikes. “Inflation in both India and the US is coming down. Then there are challenges to global growth. All these factors will play out in the next monetary policy meeting,” said the treasury head at a large state-owned bank. “A larger hike may not be necessary at this point of time.”
Figures released last week showed that India’s gross domestic product expansion for the July-September quarter slowed to 6.3%, from 8.4% a year earlier and 13.5% in the previous quarter, owing to slower growth of the manufacturing and mining sectors. Economists expect India’s growth to slow down further with Nomura projecting it at 4.7% in 2023 against an expected 6.8% increase this year.
Bandhan Bank chief economist Siddhartha Sanyal said the central bank may be conscious about not wanting to go overboard with rate hikes.
“India, unlike the US, is not accustomed to such a fast pace of interest rate increases. Also, with bank lending rates now linked to the external benchmark, the transmission (of policy rate changes to market rates) has been really quick, so there could be a sense of not going overboard,” Sanyal said. He expects a 25 bps increase this week.
The only outlier in the poll, Yes Bank chief economist Indranil Pan, said the central bank could consider giving a last dose of a 50 bps hike to ensure that the interest rate differential between the US and India was wide enough and also to ensure inflation did not rear its head again.
After this week, he expects another quarter-percentage-point increase in February, taking the repo rate to 6.65% before the fiscal year end. Some others like HSBC also expect a 25 bps increase in February, to 6.50%, and a likely pause thereafter.