The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI), which began its three-day meeting on Wednesday, is likely to keep the main policy rates unchanged in the first bi-monthly policy review this fiscal. Almost all economists News18.com spoke to expect the MPC to keep the repo rate unchanged at 4 per cent. Economists are, however, divided over whether the repo rate hike will happen in June or August. The six-member rate-setting panel will be holding its first meeting of this fiscal from April 6-8.
Will RBI MPC Retain Rates?
Since the February review, the economic environment has changed with a sharp rise in commodity prices threatening the inflationary outlook, just as the geopolitical risks impart a negative impulse to global growth.
Ritika Chhabra, Economist, and Quant Analyst at Prabhudas Lilladher, said: “While the consensus on the street is that RBI will most likely maintain status quo on interest rates in this MPC meeting, we cannot rule out the possibility of a 25bps rate hike as inflation is showing no signs of easing in near term. The Russia- Ukraine war has exacerbated the inflationary pressures as these two countries are important suppliers of certain commodities, including oil, wheat, corn, palladium. The situation remains uncertain as peace talks between the two have failed to materialize and there is no resolution in sight.”
The RBI MPC will have a tough choice in terms of weighing the still uneven domestic recovery and strong inflationary pressures which have intensified since the last policy meeting. Suvodeep Rakshit, Senior Economist, Kotak Institutional Equities, said: “ While there is a chance that the RBI hikes the reverse repo rate in the April policy, markets are unlikely to be be much affected since effective rate is much higher that the reverse repo rate due to the VRRR operations. The RBI is likely to continue to signal its intent to support the government borrowing program though refrain from any explicit measures. For the April policy, we expect the RBI to start telegraphing its intent by being more concerned on the inflation outlook while keeping the stance and repo rate unchanged.”
Inflation Control
RBI downplayed inflation risks at its February policy meeting, projecting average consumer price inflation of 4.5 per cent in FY23. “While the RBI’s inflation forecast for FY2023 will need to be revised up, it is unlikely that they will react to it immediately. We expect the RBI to sound hawkish so as to telegraph their intent to stem sustained inflationary risks and set up the next couple of policies for change in stance to neutral followed by repo rate hikes,” Rakshit said.
However, since then, petrol and diesel prices have risen cumulatively by around Rs 10 as of March 22 and are expected to rise further by Rs 10- 12. Similarly, LPG prices, which have been raised by Rs 50/cylinder, are expected to go up further by Rs 280/cylinder to avoid under-recoveries.
RBI Behind the Curve
Economists believe that the central bank is already behind the curve on tackling inflation, and will need to revise its forecast higher in this policy. “A 50-70 bps upward revision in the FY23 inflation forecast, which is currently at 4.5 per cent, is inevitable. Comments in the run-up underscore our view that the MPC will perceive inflationary risks through higher oil as supply-driven and call for administrative measures to offset the impact on inflation as well as real incomes,” said economists at Kotak Economic Research.
At the policy meeting, MPC could also highlight the downside risks to growth arising from elevated oil prices on account of the Russia-Ukraine conflict and revise the FY23 growth forecast lower from the current 7.8 per cent.
Revision of Growth Estimates on the Cards
Both Das and the deputy governor in charge of monetary policy, Michael Patra, have spoken of the need to revise inflation and growth estimates in the light of recent developments. Jyoti Prakash Gadia, Managing Director, Resurgent India, said: “RBI may also revise the growth rate projections, which may impact the stock market sentiments in the short run. However, the overall indicators as revealed by buoyant GST figures and spurt in exports augur well for the economy and may prompt RBI to continue to support growth.”
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