RBI Likely To Pause Interest Rate Hike In April Policy Meet: SBI Research

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New Delhi: The Reserve Bank of India (RBI) is expected to pause its interest rate hike and the current 6.5 percent repo rate could be the terminal rate for now, said SBI Research in its latest Ecowrap report. The repo rate is the interest rate at which the RBI lends money to all commercial banks. The next monetary policy meeting is scheduled for the first week of April 2023.

At the latest Monetary Policy Committee (MPC) of the RBI in early February, it decided to raise the repo rate by 25 basis points to 6.5 percent to keep inflation expectations anchored, break the persistence of core inflation, and strengthen the 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. ()

"The (RBI's) stance could continue to be withdrawal of accommodation, even as liquidity is now in deficit mode. RBI can always keep the options open in June (monetary) policy," the SBI Research, authored by Group Chief Economic Adviser State Bank of India Soumya Kanti Ghosh, said.

The report asserted that the RBI has enough reasons to pause the repo rate hike in the April meeting. "There are concerns of a material slowdown in the affordable housing loan market and financial stability concerns taking centre stage.

While concerns about sticky core inflation are justified, it may be noted that average core inflation is at 5.8 percent over the last decade and it is almost unlikely that core inflation could decline materially to 5.5 percent and below as post-pandemic shifts in expenditure on health and education and the sticky component of transport inflation with fuel prices staying at elevated levels will act as the constraint.

By this logic, RBI may then have to go for more rounds of rate hikes," it explained in the report. Notably, retail inflation in India fell marginally but remained above RBI's 6 percent upper tolerance band for the second straight month in February 2023, with the Consumer Price Index pegged at 6.44 percent.

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.

Under the flexible inflation targeting framework, the RBI is deemed to have failed in managing price rises if the CPI-based inflation is outside the 2-6 percent range for three quarters in a row.

On India's inflation, the Ecowrap report forecast March and April to be 5.5-5.6 percent and 4.7-4.8 percent. "Thus, the RBI will have a delicate balancing job of either looking forward to the June meeting with clear signs of inflation trending downwards or looking backward at the Jan and Feb prints in April policy.