HSBC, which expects the RBI to announce a 25-basis-point rate increase at its next policy statement Thursday, said that an end to the cycle of hardening rates now would be akin to stopping a few meters before the finish line at a marathon. The repo rate is currently at 6.50%.
Listing out inflation, growth and the rupee’s exchange rate as the three factors that shaped monetary policy over the past year, Bhandari said that the prevailing growth-inflation dynamics do not warrant a pause in rate hikes.
While the rupee has enjoyed stability so far in 2023 – following last year’s turbulence – the evolving trade-off between economic growth and consumer price pressures does not provide the RBI with room to stop monetary tightening, Bhandari wrote.
“We think improving growth prospects of the informal sector have kept inflation elevated. Manufacturers are taking this opportunity to raise prices and restore margins, keeping core inflation high,” she said.
“Inflation expectations and headline inflation remain elevated. We expect inflation to average 5.4% in FY24, above consensus expectations of 5.2%,” she added.
HSBC expects the RBI to continue with the current stance of withdrawal of accommodation as a shift to a neutral stance could be risky amid incomplete transmission of rate actions.The RBI, which has raised the repo rate by 250 basis points since May 2022, has been flagging stubbornly elevated core inflation for the past few months. Core inflation, which strips out the volatile components of food and fuel, was above 6% in February. Headline CPI inflation was at 6.4% in February, well above the RBI’s target of 4% and outside the tolerance band of 2-6%.
