The latest Ecowrap report from SBI Research predicts that the Reserve Bank of India (RBI) will stop raising interest rates, making the current repo rate of 6.5 percent the terminal rate for the time being. The repo rate is the interest rate at which the RBI lends money to all commercial banks.
Early in February, the RBI’s Monetary Policy Committee (MPC) made the decision to increase the repo rate by 25 basis points to 6.5 percent in order to maintain inflation expectations, end core inflation’s persistence, and improve medium-term growth prospects.
Raising interest rates is a monetary policy instrument that typically helps suppress demand in the economy, thereby helping the inflation rate decline. In early 2020 when Covid hit the world, the repo rate was 4 percent.
According to the report, the RBI has good justification for delaying the repo rate increase at its meeting in April. “There are worries that the market for affordable housing loans will experience a significant slowdown, and financial stability issues will take centre stage.
The SBI Research,
Written by Group Chief Economic Adviser State Bank of India Soumya Kanti Ghosh, stated that the (RBI’s) stance could continue to be withdrawal of accommodation even though liquidity is currently in deficit mode.
Although there is cause for concern about sticky core inflation, it should be noted that over the past ten years, core inflation has averaged 5.8%. Given the post-pandemic changes in health and education spending as well as the sticky component of transport inflation brought on by persistently high fuel prices, it is highly unlikely that core inflation will materially decline to 5.5% or lower.
Noteworthy, retail inflation in India decreased slightly but remained above RBI’s 6 percent upper tolerance band for the second consecutive month in February 2023, with the Consumer Price Index pegged at 6.44 percent. “By this logic, RBI may then have to go for more rounds of rate hikes,” it explained in the report.
In January, the retail inflation was 6.52 percent. India’s retail inflation was above RBI’s 6 percent target for three consecutive quarters and had managed to fall back to the RBI’s comfort zone only in November 2022.
If the CPI-based inflation is outside the 2–6% range for three consecutive quarters, the flexible inflation targeting framework considers the RBI to have failed in managing price increases.
According to the Ecowrap report, the inflation rate in India will be 5.5–5.6% in March and 4.7–4.8% in April. “The RBI will therefore have a difficult time choosing between looking forward to the June meeting with clear signs that inflation is trending downward and looking back at the Jan and Feb prints in April policy.