Analysts see RBI taking policy rates well above pre-pandemic levels by March

Citing the aggressive wording to tame inflation, analysts expect the Reserve Bank to deliver more rate increases during the current fiscal and take key policy rates to well above pre-pandemic levels.

Earlier in the day, the RBI-led Monetary Policy Committee delivered a 50 basis point increase in the key policy rate to 4.9% but left the cash reserve ratio unchanged and sounded more concerned about inflation management, even as it withdrew the ‘accommodative’ stance.

Describing the monetary policy announcement as aggressive and moving beyond just frontloading interest rate increases, HDFC Bank chief economist Abheek Barua said the central bank seemed far more concerned about inflation now, which is well reflected in the upward revision in its inflation forecast by 100 bps to 6.7% while remaining relatively more sanguine on growth impulses.

The RBI-Monetary Policy Committee was concerned about the broad-based nature of the rise in inflation and the risk of the second-round impact on inflation expectations, Mr. Barua said. Therefore, the policy rate was likely to be raised well beyond the pre-pandemic level, close to 6% by the fiscal year-end, he added.

Mr. Barua said he was also expecting the rally in bond yields–– to be short-lived amid elevated oil prices and rising global yields.

Echoing similar views, India Ratings principal economist Sunil Kumar Sinha said though rate actions were expected to balance the inflation-growth dynamics, the MPC had stated it would remain focussed on the withdrawal of accommodation, as system liquidity continued to be high with daily absorption under the Liquidity Adjustment Facility (LAF) averaging ₹5.5 lakh crore during May 4-31, 2022.

The RBI had delivered an unscheduled 40 bps rate increase on May 4.

The monetary authority has done the right thing by raising policy rates to anchor both inflation and inflationary expectation, he said.

Mr. Sinha said he was expecting further 25-50 bps increases during the course of the year as the central bank said it expected inflation to be at 7.5% in Q1, 7.4% in Q2, 6.2% in Q3 and 5.8% in Q4, averaging the fiscal price index at 6.7%.

The repo rate would rise well beyond 6% by the end of the fiscal, he said.

ICRA chief economist Aditi Nayar said she too expected rates to go up further.

More rate increases remained clearly on the table, and the repo rate could go up by 35 bps and 25 bps, respectively, in the next two policy meetings, Ms. Nayar said.

Bank of Baroda chief economist Madan Sabnavis said the policy stance indicated that the major threat to the growth process was inflation. While growth was expected to proceed on a stable path, inflation had to be addressed urgently, which meant more rate hikes on the anvil, leading to a longer time to move to a positive real interest rate regime.

He said he expected the pace of policy transmission to be slower, given the surplus liquidity in the system.

Barclays India’s Rahul Bajoria said the RBI raising inflation forecasts but keeping the growth projection signalled its intention to keep inflation at the centre of its decision making, and the desire to return to the pre-pandemic policy stance as soon as it could. The brokerage said it expected the policy rate to reach 5.75% by December, up from its earlier forecast of 5.15%.

Mr. Bajoria said the RBI may raise the repo rate by 35 bps to 5.25% in the next meeting in August, unless there was a dramatic improvement in prices, which looked unlikely, though.

He also said the MPC had messaged the ‘withdrawal of accommodation’ to ensure that inflation stayed within target.

Over the next three meetings in August, October, and December, “we expect the RBI to make inflation management its key priority, which could include steps to curb aggregate demand,” Mr. Bajoria said.

“In terms of sequencing, we now expect the RBI to deliver a 35 bps rate hike in August, and then raise the policy rate by 25 bps to 5.50% in October, while also switching to a neutral stance. Beyond that, we expect RBI to deliver one more rate hike in December to 5.75%, which we now believe will mark the end of this cycle,” he added.

These hikes would allow the RBI to lean its policy stance towards tightening while maintaining a neutral stance by the end of the calendar year, he said.

Crisil said in a note that it expected the RBI to increase the repo rate by another 75 bps this fiscal, and take it to 50 bps above the pre-pandemic level. But this would not, however, impact growth in the current fiscal because monetary policy impacts the real economy with a lag, it explained.

It added that the tightening would begin its impact growth from the last quarter of this fiscal and to a greater extent, next fiscal.