State Bank of India (SBI), in a special report, ‘Prelude to MPC Meeting on April 3-6, 2023’, stated that it expects the central bank to pause repo rate in April policy. In the February policy meeting, the Reserve Bank of India (RBI) had increased by 25 basis points to 6.5 per cent. The RBI had raised interest rates by 250 basis points since May 2022 to February 2023.
SBI, in its report, stated that latest data suggests that bank borrowings from the recently announced Fed Bank Term Funding Programme window reveal that fears of a greater bank contagion is receding even as deposits of small banks continue to decline. Smaller banks are borrowing from Fed to overcome any deposit run and hence global conditions are still evolving and fluid.
“We believe at 6.50 per cent, it could be the terminal rate for now,” stated SBI in the report.
It also expected the stance to continue to be withdrawal of accommodation even though liquidity is in deficit mode.
“The RBI has enough reasons to pause in April. There are concerns of a material slowdown in affordable housing loan market and financial stability concerns taking centre stage. While concerns on sticky core inflation is justified, it may be noted that average core inflation is at 5.8 per cent over the last decade and it is almost unlikely that core inflation could decline materially to 5.5 per cent and below as post pandemic shifts in expenditure on health and education and the sticky component of transport inflation with fuel prices staying at elevated levels will act as the constraint. By this logic, RBI may then have to go for more rounds of rate hikes,” it said.
SBI said it expects March inflation to be around 5.5-5.6 per cent and April inflation to be around 4.7-4.8 per cent.
“Thus, the RBI will have a delicate balancing job of either looking forward to the June meeting with clear signs of inflation trending downwards or look backwards at the Jan and Feb prints in April policy. Thus, it will be a delicate choice,” it said.
The report stated that Fed rate hikes could be smaller in magnitude with one last in May policy of 25 bps. It said that the challenge is now to decouple from Fed. “But the good thing is that a dovish Fed means a soft dollar and thus lower depreciation risk for the Indian rupee in the short to medium term,” it said.
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