RBI’s lower rate hike as expected, but Das’ commentary still hawkish, say analysts

• RBI announced a 35-basis point rate hike on Wednesday, after three consecutive 50 bps rate hikes earlier.
• However, RBI governor Shaktikanta Das’ commentary on inflation being “sticky” has been perceived as being slightly hawkish by analysts.
• Overall, Das’ statement today indicates that there will be another rate hike in February next year, likely around 25 basis points.

The Reserve Bank of India announced a 35-basis point rate hike on Wednesday, in line with analyst expectations. While it is a downshift from the earlier triple 50 bps rate hikes, RBI governor Shaktikanta Das’ commentary is still slightly hawkish, according to analysts.

Overall, the consensus amongst analysts was for a 25-35 basis points rate hike, and Das himself acknowledged that the bank and market’s views converged this time. However, Das reiterated that the fight against inflation was not over and that the central bank was watching it keenly - with “Arjuna’s eye” – a reference to the keen powers of concentration of a key hero in the epic Mahabharata.

While announcing the rate hike today, Das also said that further calibrated monetary policy action was needed to keep inflation expectations anchored – indicating future rate hikes.

“On balance, the MPC was of the view that further calibrated monetary policy action is warranted to keep inflation expectations anchored, break core inflation persistence and contain second round effects. These actions will strengthen the medium-term growth prospects of the Indian economy,” Das said.

So far, RBI has announced five rate hikes, totalling 225 basis points. With the latest hike, the repo rate stands at 6.25%. Analysts suggest there could be a 25 basis point hike in February next year, which would take the repo rate to 6.5%.

Sticky inflation makes the case for another rate hike, say analysts

Das underlined that while the inflation target for FY23 remained unchanged at 6.7%, it was still above RBI’s upper tolerance band of 6%. He also said that while the central bank expects food inflation to soften, the core inflation excluding food and fuel remains sticky.

Das underlined that the prices of cereals, milk and spices remain pressure points.

“The battle against inflation is far from over; we remain on guard. We have lowered the size of the hike, which is important and tells you of a shift,” said RBI deputy governor Michael Patra in a press conference, adding that the worst of inflation was over.

This, according to analysts, makes the case for another rate hike.

“RBI indicated a further calibrated rate hike, as headline inflation will remain above the target of 6% till Q4 FY23. This implies a 25 bps rate hike in February 2023,” said Amar Ambani, head, institutional equities, Yes Securities.

While the quantum of rate hikes has come down, Das’ comments were seen by analysts as being slightly hawkish with RBI’s stance on inflation and rate hikes remaining unchanged.

“In our view, today’s policy is somewhat more hawkish than expected with sticky and elevated core inflation being an additional focus,” said Garima Kapoor, economist, Elara Capital.

While RBI’s rate hike was in line with analyst expectations, the commentary on inflation was not as widely expected. “Summarising, rate hike as per expectations, commentary hawkish, which was not expected but is appropriate, and overall, a good policy which should give confidence to bond markets in the long run,” said Sandeep Bagla, CEO, Trust Mutual Fund.

Domestic data, global developments to influence monetary policy

Das said the inflation target for FY23 was unchanged, but it should come down to 5% in Q1 FY24, and edge up to 5.4% in Q2 FY24, assuming a normal monsoon.

RBI also downgraded its GDP growth outlook for FY23 to 6.8% from 7% it had predicted in September this year.

Analysts say RBI was likely to wait to see the impact of rate hikes so far, since monetary policy tightening has a delayed impact.

“Going forward, RBI’s policy decision would not just be dependent on domestic data but also the developments on the global front. As real rate of interest moves to the positive territory, RBI would like to wait and watch the implications of the rate hikes so far,” said Rajani Sinha, chief economist, CareEdge.

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