The Reserve Bank of India (RBI) may go for yet another increase in April 2023 in its benchmark lending rate as inflation remained way above its tolerance zone in February 2023. The next monetary policy meet of the RBI MPC is scheduled on April 6, 2023.
The apex bank has indicated so in a bulletin released on March 22, 2023. Raising concerns over sustained price rises, the RBI said consumer price inflation remained high, and core inflation continued to defy the distinct softening of input costs.
Official data released on March 13, 2023, show retail inflation in February was at 6.44%, a slight dip from January’s 6.52%. This indicates prices for various goods and services remained high across most categories. This also means the CPI-based inflation rate has been above the RBI’s medium-term target of 6% for nine months this financial year.
“We do think the upcoming meeting in April is going to be another 25-basis points hike, but thereafter we think the monetary policy committee is going to be divided on the path ahead because supply shock by nature cannot be dealt with by monetary policy alone…We have to see support from the government as well in terms of administrative measures of some fiscal support,” DBS Group Research executive director and senior economist Radhika Rao said on March 13, 2023, during an online session on the subject of growth resilience and sticky inflation.
Nearly two-thirds of respondents who took part in a February 14-21 Reuters poll expected the RBI to raise rates to a seven-year high of 6.75% in April, adding that it would then keep the rate steady for the rest of 2023.
Since May 2022, India’s apex bank has increased the repo rate, at which it lends funds to financial institutions in India, by 250 basis points (bps). A hundred basis point is equal to one percentage point. If the RBI were to go for a 25-basis point increase, the repo rate will be 6.75% as against 6.50% currently.
However, global brokerage firm Nomura expects the RBI to hit the pause button on rates in its April meeting, the concerns about inflation notwithstanding. The agency has based its prediction on a benign forward inflation profile, lagged monetary policy effects, worsening economic outlooks and weaker domestic demand outlook in FY24.
“As both growth and inflation surprise lower, we also believe a rate cutting cycle is on the cards this year. We maintain our view of 75 bp of cumulative rate cuts starting from October 2023,” Nomura analyst Sonal Varma said.
Industry is of the view that the banking regulator must hit the pause button to promote growth.
“After the concerted action that we saw on interest rates across the world through the pandemic, we believe it is time now to decouple from that. Inflation is coming under control. So, we hope the RBI will opt for a pause on rate hikes so that it sends a very strong signal that it is now our time to grow,” CII president Sanjiv Bajaj told Business Standard in an interview.
Meanwhile, developers’ body Confederation of Real Estate Developers’ Association of India (Credai) has urged the RBI to maintain a status quo on the benchmark lending rate, citing financial challenges faced by developers and the potential impact on housing sales due to the consequential rise in prices and home loan interest.
“In the last 1 year, the repo rate has increased from 4% to 6.5%. This burden is being solely absorbed by developers, leading to added financial burden and burgeoning costs,” it said in a statement issued on March 30, 2023.
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