RBI's MPC likely to deliver a lower rate hike

The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) is set to announce its policy decision on February 8 after the conclusion of the three-day bi-monthly policy review meeting. The meeting is closely watched by market participants and stakeholders as its outcome will significantly impact the financial markets and overall economic growth.

The six-member rate-setting panel, headed by Governor Shaktikanta Das, is widely expected to deliver a smaller repo rate hike of 25 basis points (bps) amid the softening inflation and slowing economic growth. One basis point on one-hundredth of a percentage point or 0.01%.

Market participants believe that with the retail inflation being below the 6% upper tolerance level of the RBI and the projected GDP growth slowing down in the upcoming fiscal year, the MPC might call for a hike of 25 bps in the repo rate.

The central bank raised short-term lending rates by 225 bps so far in the rate hike cycle that began in May 2022 to curb soaring inflation. The outbreak of war between Russia-Ukraine has disrupted the global supply chain resulting in soaring commodity prices.

The decisions to increase the repo rates have largely been in line with the global central banks. Skyrocketing inflation in the US prompted the US Federal Reserve to increase the federal fund rates to between 4.50% and 4.75%, the highest level since September 2007. However, in its last meeting, the Federal Open Markets Committee (FOMC) announced a quarter-point increase in its benchmark interest rate, signalling a shift down to slower rate hikes going ahead.

On the domestic front, this RBI’s credit policy comes after the presentation of the Union Budget and the Economic Survey. Hence, along with several other factors, the central bank will also consider the budget proposals and its borrowing programme in the policy.

Retail inflation, based on the Consumer Price Index (CPI), in the country seems to be coming under control. Along with this, the US Fed has also reduced its pace of rate hikes. Hence, the RBI is now expected to shift focus towards maintaining growth, which is likely to moderate in the next fiscal year due to global uncertainties.

Therefore, market participants are of the view that RBI may moderate the pace of repo rate hikes to spur domestic demand and support the economy.