RBI to hike rate by 25 bps before pausing: Experts

Softening retail inflation to weigh in February 6-8 MPC meeting

Published: 06th February 2023 07:28 AM  |   Last Updated: 06th February 2023 07:28 AM   |  A+A-

RBI, Reserve Bank of India

Image used for representational purpose only.

Express News Service

NEW DELHI:  As the Monetary Policy Committee (MPC) of the Reserve Bank of India is set to meet during February 6-8 to decide the benchmark lending rates, most experts see another 25 basis-point (bps) increase in the short-term repo rates. 

However, some see chances of a ‘pause’ in rate hikes given the slowing down of inflation, and recessionary outlook going forward. The banking regulator has been on a rate hike spree since May 2022 when it increased the repo rate, the rate at which RBI offers short-term loans to banks, by 40 bps for the first time in two years. Ever since, it has jacked up the repo rate by 225 bps in all.

As for retail inflation, it has moderated after peaking at 7.8% in April 2022. Inflation fell to 5.88% in November and 5.72% in December, going below RBI’s upper tolerance level of 6% and giving hope that the rate hike cycle is likely to end. However, most experts now feel the MPC won’t let its guard down against inflation and will go ahead with a hike before hitting the pause button.

“We believe RBI is at the end of its policy tightening cycle. A combination of rate hikes and liquidity normalisation has already resulted in an effective tightening in policy rates by nearly 300 bps, and we expect a final 25 bps hike in the February 8 policy meeting to 6.50%,” says a note from Nomura, a global financial services group. Nomura expects RBI to take a pause after February, and even start cutting interest rates from August 2023.

Yuvika Singhal, economist with QuantEco Research, also says RBI will raise the repo rate by 25 bps before pausing. “At this week’s meeting, we are looking at possibly one last rate hike by the RBI MPC in its current hiking cycle,” says Sreejith Balasubramanian, economist at IDFC AMC.

The 225 bps hike in repo rates since May 2022 has seen both lending as well as bank deposit rates going up significantly. Home loans are now attracting over 9% interest from the lows of 6.5% last year. Bank deposit rates have also gone up, albeit at a slower pace, to 7-7.5% for 2-5 year tenure.

According to Pankaj Pathak, fund manager (fixed income) at Quantum AMC, there could be a pause in the February MPC given the ease in external factors and inflation, and growth in the central bank’s foreign exchange reserves over the past few months. 


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