Slower rate hikes on the cards, say analysts ahead of RBI’s December monetary policy meet
- The Reserve Bank of India could slow its pace of rate hikes, say analysts as they expect the December hike to be in the range of 25-35 basis points.
- Amongst the key drivers for slower rate hikes is the moderating inflation, easing commodity prices and a cool down in crude oil prices.
- In addition to this, industry body CII also wrote to the central bank to consider moderating rate hikes, calling it the “need of the hour”.
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Amongst the key drivers for slower rate hikes is the moderating inflation – the consumer price index (CPI) fell to 6.77% in October from 7.41% in September. While this is still above the RBI’s upper tolerance limit of 6%, analysts say the moderation could give MPC a reason to reduce the quantum of rate hike.
The RBI also sounded less hawkish in its latest bulletin in November, saying, “With headline inflation beginning to show signs of easing, the domestic macroeconomic outlook can best be characterised as resilient but sensitive to formidable global headwinds. Urban demand appears robust, rural demand is muted but more recently picking up traction.”
RBI has hiked interest rates by 190 bps so far in 2022 – kicking off with a 40 bps hike in May, followed by a 50 bps raise each in June, August, and September.
Hundred basis points make up a percent.
The expectations of RBI moderating the pace of rate hikes come at a time when there are talks of the US Fed also slowing down and reflecting on the impact of the hikes so far.
“Since monetary policy acts with a lag, the monetary policy committee (MPC) may want to take a bit of a breather in its fight against inflation to assess the impact of past policy actions. In light of the above, the upcoming policy meeting may see only a 25 bps policy rate hike,” said Churchil Bhatt, executive vice president and debt fund manager, Kotak Mahindra Life Insurance.
Moderating inflation, cooler crude, rebounding rupee – three factors in favour of a slower rate hike
A combination of three factors are likely to push RBI to slow down the pace of rate hikes. Moderating inflation will be amongst the key drivers, say analysts.
“The RBI’s December policy meeting will likely see the MPC hiking repo rate by 35 bps; lower than the last three hikes of 50 bps. The domestic inflation trajectory, while remaining above the upper limit of the RBI’s inflation target band, is gradually moderating. Inflation in most developed economies remains elevated but showing signs of peaking,” said Suvodeep Rakshit, chief economist, Kotak Institutional Equities.
Advertisement“Commodity prices have also come off, and the recent fall in crude prices is also encouraging though uncertain whether it will sustain. These factors will provide some confidence to the RBI in slowing the pace of rate hikes,” Rakshit added.
Since RBI called out ‘globalised inflation’ as one of the reasons for rate hikes in June, crude oil prices have cooled to $84 per barrel from $124 per barrel – declining over 32%.
Apart from this, the Indian Rupee has also rebounded against the US Dollar in the last one month, appreciating 1.45%.
India Inc wants a slow down in interest rate hikes as well
Industry body CII has also written to India’s central bank seeking a moderation in rate hikes in the backdrop of a domestic demand recovery, as well as the pressure on India Inc’s top and bottom lines.
Advertisement“The domestic demand is recovering well as mirrored by the performance of (a) host of high-frequency indicators, however, the prevailing global polycrisis is likely to impinge on our growth prospects too,” CII said in its letter to the RBI, adding that a moderation in rate hikes is the “need of the hour”.
For context, India Inc reported a decline in net profit growth for the September quarter – net profit of 1,917 Indian companies declined 5.4% to ₹2.18 lakh crore, while revenue grew 24% year-on-year to ₹25.6 lakh crore.
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