The markets expect the Reserve Bank of India (RBI) to raise the policy repo rate by 25 basis points to check inflation, which is above the central bank’s upper band of 6 per cent for two consecutive months.
However, the crucial question is whether the central bank will press the pause button after the hike along with a clear communication of its intent to stop the current rate tightening cycle that started in May, 2022. The RBI has already rasied rates by 250 basis points since May.
While many economists believe the hikes will end,they remain divided on the central bank’s stance — whether it will be neutral or the withdrawal of accommodation.
The Monetary Policy Committee (MPC) of the RBIwill meet on April 3, 5 and 6 — the first bi-monthly meet for fiscal 2023-24, with retail inflation at 6.44 per cent in February and 6.52 per cent in January.
Besides inflation, the banking turmoil in the West — that began with the collapse of the Silicon Valley Bank followed by the takeover of UBS by Credit Suisse — poses a challenge to the MPC.
Though there has been no fresh bad news on this front recently, the crisis is expected to have some impact on global economic growth.
“We expect the RBI to hike the repo rate by another 25 basis points. The present macroeconomic environment is witnessing weaker than expected global growth trend for an extended period, supply-side shocks to global commodity/domestic food prices, and progressive tightening of financial conditions, ’’Mandar Pitale, head treasury, SBM Bank India, said.
“This may lead to weaker business sentiments in the longer run. Given the current backdrop of high inflation and mixed-signal on growth, the RBI will need to walk a tightrope to achieve a balance.’’
Economists believe the RBI will go for a pause after Thursday’s hike as it wants the full transmission of the past increases to play out in the economy.
A recent study by the State Bank of India said fewer individuals were applying for affordable housing loans, as sign of the tightening impact some sectors.
“Home loan interest rates are already at an alarmingly higher level of 9.5 per cent and above in response to the increase in repo rates. While the rationale for another potential hike is being justified for inflation containment amidst a global gloomy environment, it is pertinent to evaluate its adverse impact on the real estate sector. With homebuyers already stretched on EMIs and loan tenures, a further hike in interest rate will hit them hard,’’ cautions Vimal Nadar, head of research at Colliers India.
