Of the 11 participating economists and experts, 7 believe that the RBI will not hike the repo rate this fiscal. While three of them said that the central bank’s action was difficult to predict, only one economic expert said that the repo rate would be raised in the latter half of the financial year.
Repo rate is the rate at which RBI lends short term money to banks. On the other hand, reverse repo rate is the rate at which banks lend money to RBI for a short period. The two rates together form an interest rate corridor under the central bank’s Liquidity Adjustment Facility (LAF) and are used as key policy instruments for holding. inflation within a target range.
While the main objective of monetary policy is to ensure price stability, it must do so keeping in mind the need for sustainable GDP growth. The Indian economy witnessed its worst contraction of -24.4% in April-June 2020. The COVID-hit Indian economy saw the repo rate cut by 40 basis points in the MPC to 4% in May 2020 to support growth. The reverse repo rate was also cut by 40 bps.
Since then, the economy has bounced back with the latest GDP growth of 20.1% largely due to the base effect. Most of the high-frequency economic indicators suggest a sustained recovery, so the question arises: when will the RBI start siphoning off excess liquidity.
When will the interest rate cycle change?
Most of the experts surveyed by TOI-Online are of the view that the reverse repo rate hike is the first step towards the turning point of the interest rate cycle. A hike in the reverse repo rate will make it more attractive for banks to park their funds with the central bank, thereby draining excess liquidity from the system.
Yes Bank Chief Economist Indranil Pan and PwC India’s economic advisory services leader Ranan Banerjee see a turnaround in the interest rate cycle in the first quarter of FY23. Madan Sabnavis, Chief Economist, CARE Ratings is of the view that the interest rate cycle first reverse repo rate will be hiked to 3.50%, which may likely happen in the February policy.
Shubhada Rao, Founder, QuantEco Research, also expects reverse repo hike in the coming months. “We expect the reverse repo rate to increase by 40 bps between December 21 and February 22,” she tells TOI in the survey. This will be followed by a hike in the repo rate in the first quarter of FY13, she says.
Satchidanand Shukla, Chief Economist, Mahindra Group sees the cycle turning around by the end of the next calendar year.
inflation holds the key
The MPC aims to keep annual consumer price index (CPI) inflation in the range of 2-4%. CPI Inflation It has been consistently above 5% over the past few months, although figures for July and August suggest some moderation. Economists expect inflation to remain above 5% for the rest of the financial year due to seasonal factors and commodity prices. So, does RBI need to hike rates to ease inflationary pressures?
An economist at a leading financial institution told TOI that for a turnaround in the interest rate cycle, the RBI will look at how inflation moves up. “Inflation will primarily stem from imported inflation as oil prices and commodity prices have risen sharply,” the economist said in the survey. “Interest rates have come down from the bottom. RBI may not consider raising rates at least this calendar year as it is very important for the economy to come back to normal and hence RBI wants to keep the interest rates as low as possible, The economist added.
DK Srivastava, Chief Policy Adviser, EY India, has a different opinion on the timing of the repo rate hike. Experts expect the repo rate to increase by 25 basis points in the last part of this financial year itself.
According to Srivastava, concerns over inflation and strengthening of the economic recovery will boost growth. “Inflation is on the rise and right now supply-side factors like higher cost of primary commodities and petroleum products are contributing to this. In the later part of the financial year, I expect demand-side factors to play a role too,” he told TOI. tells. “As the economy recovers, consumption demand will increase which in turn will fuel inflationary pressures,” he says.
However, another economist at a leading trade body believes that inflation has moderated. Economists point to uncertainty in the pace of economic recovery. “Sustaining this year’s high growth rate will be a challenge in the years to come, given that domestic consumption as well as investment are yet to pick up. The informal sector is lagging behind the corporate sector, leading to a rise in rates this year. Not likely to increase.” Economists point out that 10-year yields will soften first before rising.
Vikas Vasal, national managing partner for taxes at Grant Thornton, says the RBI has several factors to consider when deciding the next course of action. “… these include how the ongoing pandemic is shaping up after the festive season, US Fed’s decision on interest rates, Indian economy continues to boom, any major global geopolitical events with significant economic impact, financial markets Any improvement globally and in India,” he tells TOI.
After October 8, there are two more scheduled policy meetings in December and February of the current fiscal. RBI in its last policy review had said that inflationary pressures during Q1 are largely driven by adverse supply shocks, which are expected to be temporary. The MPC also voted in favor of an “accommodative stance” as long as necessary to revive and sustain growth on a sustainable basis.
Any decision to hike policy rates will depend on how momentary the RBI thinks inflationary pressures will remain, and whether the economic recovery is broad enough to harden its stance.
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