RBI largely expected to hike repo rate by 25 bps in April even as US Fed expected to take a pause

RBI largely expected to hike repo rate by 25 bps in April even as US Fed expected to take a pause
Shaktikanta Das, governor, Reserve Bank of IndiaBCCL
  • Most economists believe that a 25-basis-point rate hike in April is almost certain.
  • This is after the February CPI inflation print came in at 6.44% – a number that is slightly lower than January’s print of 6.52%, but still above the Reserve Bank of India’s upper tolerance limit of 6%.
  • The US Fed, which has so far led rate hike action, is expected to take a pause in March due to the collapse of Silicon Valley Bank and Signature Bank.
Shaktikanta Das-led Monetary Policy Committee (MPC) is expected to hike the repo rate by 25 basis points (bps) come April, as retail inflation continues to remain hot and above the central bank’s upper tolerance limit of 6%.

This is despite the fact that the recent collapse of Silicon Valley Bank and Signature Bank in the US has resulted in analysts saying the US Federal Reserve is likely to pause its rate hike spree to let the country’s banking system take a breather.

While the US Fed has led other central banks in raising interest rates so far, the Reserve Bank of India (RBI) could stick to its guns regardless of what the Fed does on March 22, when it meets to decide the direction of its monetary policy, analysts say.

“The RBI will remain hawkish in the April policy as inflation prints have spiked
back over 6% in January-February along with core inflation remaining sticky
above 6%. We continue to expect a 25 bps repo rate hike in the April policy,” said Suvodeep Rakshit, senior economist, Kotak Institutional Equities.


Hundred basis points make up a percentage point.

Hot inflation, hawkish Das

Inflation running hot could also result in RBI’s Das maintaining his hawkish stance. Announcing the last rate hike in February, Das noted that core inflation has remained sticky. “On balance, the Monetary Policy Committee (MPC) was of the view that further calibrated monetary policy action is warranted to keep inflation expectations anchored,” Das had said at the time.

Since then, the inflation numbers have not been encouraging – the January inflation print came as a shocker, with the consumer price index (CPI) inflation rising from 5.72% in December to 6.52% in January. It was 6.44% in February. This has prompted analysts to suggest that RBI could go in for another 25 bps hike in April, taking the repo rate to 6.75% and the quantum of hikes to 275 bps since May 2022.

“We also believe that a 25-basis-point hike in April by the RBI is almost certain,” said Nikhil Gupta, chief economist at Motilal Oswal, adding that the worst of inflation was likely behind us.

RBI’s next bi-monthly monetary policy meeting is scheduled for April 6.

April hike certain according to most economists

Despite the adverse developments in the US banking system, most analysts maintained that a 25 bps hike in April is almost a given.

“We do think the upcoming meeting in April is going to be another 25 basis points hike, but thereafter we think the monetary policy committee is going to be divided,” said Radhika Rao, senior vice president and economist, DBS Bank.

On the other hand, according to Siddhartha Sanyal, chief economist and head of research at Bandhan Bank, the developments in the banking sector in the US “will likely have a bearing on the Fed’s course of action, and, thereby, on monetary policy across countries.” In conjunction with the drying up of excess liquidity in the Indian banking system, the “bar for further hike in the repo rate has moved higher,” according to Sanyal.

Economists at SBI Research have pushed back their estimates by a month for inflation cooling down to 5% – they now see it happening by April, from March earlier. “Inflation will decline materially and come down to 5% by April 2023. For Q1 FY24, we expect an average CPI of 5.1%,” said a report by SBI Research.

RBI has projected CPI inflation at 6.4% for FY23 and 5.3% for FY24.

While the April rate hike is almost certain now, further hikes will depend on whether or not there are more inflation shockers in store.


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