With economic experts expecting the Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) to increase the repo rate further by 25 basis points (bps), whether it will be unanimous or not will have to be seen. The MPC’s first meeting of FY24 is underway from April 3 to April 6. The decision on the repo rate hike will be announced on April 6. So, if the MPC decides on a rate hike, then it may not be unanimous. At the previous MPC meetings, the rate hike decisions were not unanimous with two external members — Dr. Ashima Goyal and Prof. Jayanth R. Varma voting against the hikes.
To hike or not to hike could be the most discussed agenda as the clamour for a pause seems to be only growing. For instance, at the February 6-8 MPC meeting, two members had voted against the move to hike the repo rate by 25 bps to 6.50 per cent. On the other hand, four others including RBI Governor Shaktikanta Das voted for the rate hike. The resolution was passed by a majority of 4:2. Meanwhile, differing views are being expressed by experts on the interest rate with one saying the MPC may hike the repo rate by 25 bps and hit the pause button. The other view is that the MPC may hit the pause button on the rate hike for now. However, the latter is slightly remote as the inflation continues to be sticky — the rate hikes are made to control the inflation.
Further the RBI had recently written to the central government on the steps it would take to control inflation/price rise. “The RBI’s decision in April is likely to be influenced by the unexpectedly high consumer price index (CPI) inflation numbers recorded in the last two months,” said CARE Ratings in a report. Further, the report mentioned that the January and February spike in CPI inflation, combined with core inflation remaining above 6 per cent may push the policy outcome in favour of one more rate hike. Moreover, the latest inflationary expectations data does not suggest a significant relief.
Other factors such as unseasonal rain, early forecasts of El-Nino, rising prices of milk and sugarcane and others are negative for the inflation outlook. On the other hand, the banking crisis in the US and Europe and the slowing growth outlook might also be considered by some members. Another 25 bps rate hike with a stance change to neutral looks like the most likely outcome. The bond market will focus more on the RBI’s future outlook. A 25 bps rate hike is broadly in price while retention or change of stance will move the bond market. Retention of the current policy stance as ‘withdrawal of accommodation’ will be perceived as an indication of further rate hikes and thus will be negative for the bond market.
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