MPC meet: Will RBI hit pause button or opt for another rate hike on Thursday?

Market watchers foresee another 25 basis points hike in repo rate by the RBI’s Monetary Policy Committee (MPC) on April 6. This would take the repo rate to 6.75 per cent, which may help cool down inflationary pressure in the economy. Earlier, in the February meeting, most of the MPC members were worried about core inflation. Since then, the domestic CPI inflation has remained above 6 per cent for the last two months. Additionally, the upside risks to food inflation exist due to unseasonal rains and in case there are El Nino-led disruptions. On the other hand, the banking crisis in the US, Europe and the slowing growth outlook might also be considered by some members of MPC while taking a stance on rate hike. The apex bank hiked the repo rate by a cumulative 250 basis points in the previous financial year ended March 2023. Here’s what market watchers have to say about the first MPC outcome of the financial year 2024:

Rohin Agarwal, Vice President, Avener Capital

There have been increasing concerns that rapid rate hikes by central banks have been a major driver for recent failures in small banks of the US and EU. Thus, RBI will have to balance its commitment towards taming inflation while ensuring that India’s financial system is not exposed to extraordinary shocks. The expectation around Fed revisiting its aggressive stance on inflation will also be a consideration for RBI. Another 25 basis points rate hike with a stance change to neutral looks like the most likely outcome. The market will also look for the RBI’s position on liquidity conditions. The banking system liquidity deficit is likely to increase during the April-June period. In absence of liquidity support from the RBI, the short-term rate can move higher meaningfully.

Ravi Subramanian, MD & CEO, Shriram Housing Finance

As the central banks of the developed economies such as the US Fed, European Central Bank and Bank of England have continued with hiking rates, we expect the MPC to follow with a hike of 25 basis points or lesser this week. The consumer prices and core inflation have remained high and are a cause of concern.

Aditya Damani, Founder, CEO, Credit Fair

As the retail inflation is above the RBI’s upper tolerance level of 6 per cent, the scenario sets the context for another rate hike. Since controlling inflation is the priority of the RBI, a pause in the rake hike is unlikely. However, we expect the RBI to alter its stance from the withdrawal of accommodation to neutral to boost the growth outlook of all the key sectors.

Deepak Agrawal, CIO-Debt, Kotak Mahindra AMC, Kotak Mahindra Asset Management Company

Given that US Federal Reserve and European Central Bank have gone ahead with a rate hike in spite of recent global developments and Q4FY23 inflation numbers are higher than RBI projections, RBI may hike repo rate by 25 bps to 6.75 per cent. Given real policy rates upward of 100 bps rate basis, significant monetary tightening over the last one year and the lag with which monetary policy operates, we expect RBI to change its stance to “neutral” and stay on hold for the rest of CY23.

Pankaj Pathak, Fund Manager-Fixed Income, Quantum AMC

Another 25 bps rate hike with a stance change to neutral looks like the most likely outcome. We would expect a more divided MPC with external members voting for a pause, while RBI members voting for a hike. There is a high probability of a 3-3 vote and the use of the governor’s casting vote in this policy. The bond market will focus more on the RBI’s future outlook. A 25 bps rate hike is broadly in price while retention or change of stance will move the bond market. Retention of the current policy stance as ‘withdrawal of accommodation’ will be perceived as an indication of further rate hikes and thus will be negative for the bond market.

The market will also look for the RBI’s position on liquidity conditions. The banking system liquidity deficit is likely to increase during the April-June period. In absence of liquidity support from the RBI, the short-term rate can move higher meaningfully.      

Karan Desai, Founder, Interface Ventures

With retail inflation staying doggedly over the 6 per cent tolerance threshold of the central bank for January (6.52 per cent) and February 2023 (6.44 per cent), the RBI could consider hiking rates marginally by another 25 bps in the MPC outcome on April 6. Rate hikes could peak out at a max repo rate of 7 per cent in later quarters of FY24 depending on how quickly the CPI comes below 6 per cent.

Nuvama

In its continued effort to rein in persistently elevated inflation, the RBI is expected to raise key interest rates yet again by 25 bps at its upcoming first monetary policy for 2023-24 on April 6, 2023. This would take the repo rate to 6.75 per cent which would be the highest rate in 7 years (since March 2016). The MPC’s policy outcome would be presented against the backdrop of unexpectedly high domestic CPI inflation recorded in the last two months, continued rate hikes by key global central banks (Fed, BoE, and ECB), volatility in the global financial markets and persistent underlying inflationary pressures.

Also read: RIL, ITC, TCS, SBI, Infosys: How LIC's top 10 stock holdings fared in 2023 so far

Also read: YES Bank shares: Private lender's stock in focus after March quarter updates