Against the global balancing act between hiking interest rates, withdrawing systemic liquidity and the series of recent bank failures, the Reserve Bank of India’s Monetary Policy Committee (MPC) is likely to raise the policy rate by another 25 bps in its first bi-monthly monetary policy for FY24, taking cognizance of the contagion impact on the Indian economy.

Weaker-than-expected global growth, supply side shocks to global commodity and domestic food prices, consistently high CPI inflation and tightening of financial conditions warrant the need for another hike before the RBI can take a pause, said analysts.

Pause after April?

The three-day MPC meeting will commence on April 3 and the outcome will be announced on April 6.

Also read: Explained. How will soaring CPI inflation impact RBI, Centre’s actions?

“The recent global developments will be weighing heavily during the policy decision-making by the MPC. With domestic inflation also remaining at elevated levels, we expect a 25 bps hike in the repo rate followed by a prolonged pause,” Upasna Bhardwaj, Chief Economist at Kotak Mahindra Bank, said.

The expectation stems from the fact that the European Central Bank, US Federal Reserve, Bank of England and Swiss National Bank — have all increased policy rates despite bank failures. “We do expect RBI to increase the repo rate by 25 bps and probably change the stance to neutral. The inflation is high at 6.5 per cent and 6.4 per cent for the last two months,” Madan Sabnavis, Chief Economist at Bank of Baroda, said.

“Given that the Fed and ECB have raised rates, there is an external factor to consider too in the context of maintaining forex stability. Therefore, increasing the repo rate is justified for the last time,” he said.

Also read: US inflation can drop without much harm to job market: Fed’s Waller

Analysts expect RBI to go on pause post April, till more clarity emerges on the monsoon and kharif crop and El Nino-led disruptions — all of which pose potential upside risks to inflation. While the tightening of systemic liquidity is likely to prompt a shift in stance, it will also signal the end of the rate hike cycle and assuage the market that sufficient liquidity will be provided, experts said.

However, SBI Research had, in a recent note said the RBI is likely to maintain status quo owing to financial stability concerns, expectations of a slowdown in affordable housing loans, average core inflation being around 5.8 per cent over the last decade, and the repo rate at 6.5 per cent already being higher than the optimal rate of 6.20-6.32 per cent.

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