MPC may go for back-to-back repo rate hike to temper inflation

Shaktikanta Das, Governor, Reserve Bank of India

The monetary policy committee (MPC) is expected to go in for a back-to-back ‘no-brainer’ repo rate hike to combat inflation, with experts forecasting 35 to 50 basis points hike.

The MPC, which will announce its decision on repo rate on June 8, had hiked the policy repo rate by 40 basis points (40 bps) from 4 per cent to 4.40 per cent in an offcycle meeting on May 4.

Retail (consumer price index/CPI-based) inflation has been ruling at or over the MPC’s upper tolerance limit of 6 per cent since the beginning of 2022.

The January 2022 inflation reading came in it at 6 per cent. Thereafter, it has been north-bound – February (6.1 per cent), March (7 per cent) and April (7.8 per cent).

The “State of the Economy” article in RBI’s latest bulletin has cautioned that heightened global risks stemming from weakening growth, elevated inflation, supply disruptions on account of geopolitical spillovers and financial market volatility stemming from synchronised monetary tightening pose near-term challenges.

Reserve Bank of India Governor Shaktikanta Das, in an interview to a business TV channel on May 23, had said that expectations of a rate hike are a no-brainer as inflation is a major area of concern even as economic recovery is steady and gaining further traction.

This comment came in the backdrop of his April 2022 observations that the central bank’s sequence of priority is inflation first and after that growth.

MPC to up repo rate

Soumya Kanti Ghosh, Group Chief Economic Adviser State Bank of India, in a report, observed that geo-political crisis, elevated oil and commodity prices, fuel price and rupee depreciation pass through and rate hikes by Fed pose a risk to growth and inflation. Hence, the MPC is expected to up the repo rate by 50 basis points.

“The persistence of high inflation is forcing countervailing monetary policy action at a time when supporting the economic recovery should have been assigned priority. Back-to-back rate hike is imminent in June policy,” he said.

When it comes to hiking cash reserve ratio (CRR), which was upped 50 bps to 4.50 per cent of Banks’ deposits with effect from the reporting fortnight beginning May 21, 2022, Ghosh said it could be “touch and go”, with Government spending holding the key.

He underscored that CRR hike should be viewed more through the prism of building up a war chest of supporting the market by releasing the impounded liquidity in future through OMO (open market operations).

Suvodeep Rakshit, Senior Economist, Kotak Institutional Equities, expects MPC to hike repo rate by 40 bps in the June policy meeting.

“However, we should be open for a rate hike between 35-50 bps hinging on how the MPC wants to reach the pre-pandemic repo rate of 5.15 per cent or around that mark by the end of the August policy.

“The RBI is likely to hike the CRR in one of the upcoming policies but will be contingent on how it sees the the durable liquidity panning out over the next few months. We expect another 50 bps of CRR hike by end-FY2023,” he said.

RBI to revise inflation estimates

Rakshit opined that along with the repo rate hike, the RBI will also revise its inflation estimates higher, possibly indicating inflation remaining close to 7 per cent for most part of CY2022.

Ajay Manglunia, MD & Head of Investment Grade Group, JM Financial, said: “After the pandemic started, MPC had slashed the repo rate by 115 bps. Now, as part of policy normalisation, they have done 40 bps rate hike so far.

“The market knows that remaining 75 bps rate hike is on the cards and the same could happen over the next two policy meetings or MPC may pause after the next meeting and hike thereafter. The expectation is that they may hike repo rate by 35 to 50 bps in the forthcoming meeting.”