The spike in the March retail inflation to 6.95 per cent followed by the jump in bond yields has ignited a debate on the extent and timing of RBI’s repo rate hike — which will make home and auto as well as corporate and MSME loans costlier.
The pundits are expecting an increase in the repo rate from anywhere between 75 basis points this fiscal and 200 basis points over a longer period, stretching well into the next financial year.
SBI group chief economic adviser Soumya Kanti Ghosh said the RBI would raise the rates by 25 basis points each in June and August.
Sonal Varma, MD and chief economist for India at Nomura, projected the repo rate will be increased up to 200 basis points through 2023.
Rahul Bajoria, MD and chief India economist, Barclays, said there will be four hikes each of 25 basis points in this fiscal beginning June.
Analysts also do not rule out the possibility of the monetary policy committee (MPC) of the RBI sending a report to the Centre later this year in the event of failing to meet the inflation target for three quarters in a row. The average CPI inflation in January-March was 6.34 per cent, higher than the RBI target of 6 per cent.
In sync with the higher retail inflation, the 10-year government bond yield is moving on an upward trajectory. The yield hit a three-year high at 7.25 per cent on Wednesday, up from 7.18 per cent on Tuesday and is poised to hit the 7.50 per cent mark.
“Historically the spread between the repo and G-sec hovers around 250 basis points. In an interest rate hardening cycle, the spread vaults up to 350 points. The 10-year benchmark yields should thus move towards 7.50 per cent, even with the current repo rate at 4 per cent,” Ghosh said.
The spread between G-sec yields and the repo rate jumps in an increasing interest rate cycle, and the yields could touch 7.75 per cent by September. “We believe, the RBI will keep the yields capped at 7.5 per cent through unconventional policy measures,’’ Ghosh said.
Nomura’s Varma said in a note “with the inflation outturn materially to the upside and momentum still rising, we are lifting our terminal repo rate forecast to 6 per cent by the third quarter 2023, with a 25 basis points rate hike at each of the next eight MPC meetings (200 basis points in cumulative hikes)”.
Nomura raised its CPI inflation forecast to 6.6 per cent in this fiscal from 6.2 per cent earlier, much higher than the RBI estimate of 5.7 per cent. It feels inflation will remain above 6 per cent throughout 2022-23, and breach 6 per cent for three consecutive quarters.
Barclays has forecast CPI to come at 5.8 per cent in 2022-23. The brokerage expects the April headline number to come at around 7.1 per cent.
Meanwhile, the World Bank has cut its economic growth forecast for India to 8 per cent from 8.7 per cent for this fiscal.