The RBI expects a rate hike to 6.25% in December: Report

Bengaluru: According to economists surveyed by Reuters, the Reserve Bank of India will increase interest rates by a lesser 35 basis points to 6.25% in December. These economists anticipate another slight increase early next year to reduce residual inflation concerns.
A solid two-thirds majority concluded that it was still too early for the central bank to stop monitoring inflation, which fell to 6.77% in October after remaining above the RBI’s tolerance level of 2-6% for the whole year.

Following a succession of rate increases of 50 basis points by the RBI, there are expectations for a more gradual rate increase. These expectations are in line with predictions that the U.S. Federal Reserve would switch to smaller rate increases at its policy meeting this month.

33 economists, or more than 60% of those surveyed between November 22 and 30, predicted that the RBI would increase its benchmark repo rate by 35 basis points to 6.25% at its policy meeting on December 7–9.

Eleven respondents predicted a 50 bps increase in the future, while eight others predicted a 25 bps increase.

Sakshi Gupta, principal India economist at HDFC, said that a 50 bps hike would be excessive given that inflation has begun to moderate and is moving in line with the RBI’s projections.

The expected terminal rate for this cycle is 6.50%, and the path there will likely involve two rate increases: 35 basis points in December and then 25 in February.

Rates are likely to increase slightly as a result of the expectation that inflation would remain above the RBI’s target range of 4.00% for the next two years, and most economists perceive an upside risk to their predictions.

The RBI must also take into account the pressure that could be placed on the currency if it lags behind anticipated hikes in U.S. rates.

According to Abhishek Upadhyay, senior economist at ICICI Securities Primary Dealership, “the risk that the Fed tightens even more than current pricing of close to 5% is reasonably high and that could keep pressure on emerging market central banks, such as the RBI, to defer signalling the end of rate hikes.”

Although poll medians indicated that the repo rate will peak at 6.50% by the end of March, analysts could not agree on the RBI’s final rate change for this cycle.

At the February meeting, economists were evenly split between predicting no increase and a rise of 25 basis points, with 44 of 52 expecting those results. Five of the remaining forecasts were for a 35 bps increase, and there were lone predictions for 10 bps, 15 bps, and 40 bps.

The study also revealed forecasts for an inflation rate of 6.7% on average for the fiscal year ending March 31 and 5.2% in the following year (2023–24).

An abrupt increase in commodity prices, supply-side shocks, the resilience of domestic demand engines, and a protracted global tightening cycle that would put pressure on the rupee are risks, according to Radhika Rao, senior economist at DBS Bank, “that might convince the RBI to consider extending its rate hike cycle.”

At the February meeting, economists were evenly split between predicting no increase and a rise of 25 basis points, with 44 of 52 expecting those results. Five of the remaining forecasts were for a 35 bps increase, and there were lone predictions for 10 bps, 15 bps, and 40 bps.

The study also revealed forecasts for an inflation rate of 6.7% on average for the fiscal year ending March 31 and 5.2% in the following year (2023–24).

An abrupt increase in commodity prices, supply-side shocks, the resilience of domestic demand engines, and a protracted global tightening cycle that would put pressure on the rupee are risks, according to Radhika Rao, senior economist at DBS Bank, “that might convince the RBI to consider extending its rate hike cycle.”