RBI MPC meet: RBI MPC meet: Wait for hawks may take longer

Even though inflationary pressures are rising amid uneven economic recovery, many analysts have opined that the Reserve Bank of India (RBI), led by Governor Shaktikanta Das may wait a tad longer before opting for an aggressive hawkish tilt, like their global counterparts.

“Though a large part of the inflationary pressures is supply-side, coming from direct and indirect pass-through of energy and commodity prices, these have kept inflation closer to the RBI’s upper tolerance band for consumer price inflation, for the last two fiscals,” CRISIL’s Principal Economist Dipti Deshpande told ET Online.

Analysts expect consumer price inflation (CPI) to stay almost as high as fiscal 2022 and the RBI to raise the policy repo rate by 50-75 basis points through the year & expect RBI to show lower tolerance to inflation than they have through the pandemic.

“Broadly, we expect the RBI to move to a neutral monetary policy stance in the early part of fiscal 2023 and announce a hike in the reverse repo rate first. Both these would provide a signal to the economy about the RBI’s intent,” Deshpande said.

While prominent global central banks like the US Federal Reserve and the European Central Banks have already signalled a hawkish tilt, the Monetary Policy Committee (MPC), has opted to support growth over curbing inflation.

In February 2022, the retail inflation in India hardened to an eight-month high of 6.07% from 6.01% in Jan 2022, exceeding the 6.0% upper threshold of the MPC’s forecast range of 2.0-6.0% for the second straight month.

Nomura in a note authored by Aurodeep Nandi and Sonal Varma wrote that the RBI is being overly optimistic on inflation and that a course correction in monetary policy is warranted. It now expects a policy pivot only in June and is building in 100 bps in cumulative repo rate hikes in 2022.

In the last couple of months, the inflationary concerns have got aggravated amid rising global commodity prices, including crude oil prices owing to the geopolitical tensions caused by Russia’s invasion of Ukraine. “In this economic backdrop, the RBI is likely to change its stance to neutral in the upcoming monetary policy to prepare the market for eventual rate hikes going forward,” Rajani Sinha, the Chief Economist at CareEdge told ET Online.

“While the RBI is expected to maintain its growth focus in the upcoming meeting, there will be a cautious view on inflation given the strengthening price pressures in the economy. We expect RBI to be gradual in its move towards normalisation as growth concerns still persist. While the RBI is expected to leave repo rate unchanged, the reverse repo rate is likely to be hiked to normalise the band,” she added.

“We expect a change in stance to neutral in 1QFY23. We are penciling in 50 bps of rate hikes in FY23, however we do not expect aggressive tightening in FY23,” Teresa John, Economist at Nirmal Bang Institutional Equities told us.

All but six of 50 respondents polled by news agency Reuters between March 29 and April 5 forecast no repo rate change on Friday, when RBI Governor Das will announce the outcome of the ongoing MPC meet. Thirty-two expected rates to still be unchanged by end-June.

State Bank of India’s Group Chief Economic Adviser Dr. Soumya Kanti Ghosh has opined that the RBI may continue with its accommodative stance and sees a limited chance of it opting for a neutral stance.

“The conflict in Europe brings risks of higher inflation and slower growth. From a macroeconomic standpoint, India’s policymakers have experienced a narrowing of their policy options in the last few weeks,” said Rahul Bajoria, chief India economist at Barclays.