Expectations are that the MPC will continue to vote for higher interest rates in its next two meetings in September and December taking the Reserve
‘s (RBI) benchmark repo rate at least 50 basis points higher from the current 5.40%. One basis point is 0.01%.
However, softening food and fuel prices and challenges to growth will likely ensure that the repo rate does not touch the August 2018 peak of 6.50%.
Barclays India economist Rahul Bajoria said the MPC minutes showed that front-loaded rate hikes and moderating inflation suggest that policy rates are moving closer to desired levels, leaving less scope for major rate increases in the upcoming policy reviews.
“We continue to expect the terminal rate in the current cycle to be 5.90% and to be achieved by the December policy review,” Bajoria said.
The minutes showed that MPC member Ashima Goyal considered current policy rates already close to neutral levels. Member Jayanth Varma said indicating a terminal repo rate of 6.50% is unwarranted in the current situation that the economy is in, citing risks of a global recession and falling commodity prices, which could lead to significant downward adjustments to the projected inflation trajectory.
“It is easy to imagine that a few months from now, the economic data could point to a terminal repo rate that is well below 6.50%. To focus on one thing implies paying less attention to other things, and I do not think it would be wise to say that the MPC will remain ‘focused’ on withdrawal of accommodation ignoring other considerations,” Varma said while recording his dissent on the withdrawal of accommodation.
Economists say if lower oil, food and commodity prices persist, consumer price inflation will fall below 6% around February, reducing the chances of rates going above 6%.
“Moreover, the likely erosion of incomes and aggregate demand post-Covid means that current conditions are extraordinary and not very comparable to previous cycles. Though part of the gap has been filled, there is still some slack. On the whole, while a couple of months ago there were upside risks to inflation, those risks are now relatively balanced. This implies that if prices don’t rise unexpectedly, hikes will be more moderate and calibrated,” said Saugata Bhattacharya, chief economist at
.
Economists from
Primary Dealership said the decision of the MPC to increase the repo rate above 6% could depend on an extended US rate hike cycle or from MPC and the RBI focusing more seriously on attaining a 4% inflation target.
“Given the continued focus on withdrawal of accommodation, the bar for a rate hike is low and we continue to work with a baseline view of 35 basis points hike in September and 25 basis points hike in December before the MPC could consider a breather. The decision in September is likely to be between 35 and 50 basis points and the committee’s view on terminal rates could decide the quantum of the hike,” ICICI Securities Primary Dealership said in the note.
