With economic growth moderating, will RBI go slow on rate hikes?

RBI

Indian Market
by 5paisa Research Team Last Updated: 2022-11-23T13:10:43+05:30

An economic slowdown may be on the anvil, but the Indian central bank may be in no mood to go slow on rate hikes, at least not just yet.

While the fiscal second quarter growth may be just half of what it was in the first quarter, the central bank may not still put a brake on raising interest rates as price pressures continue, a report in The Economic Times has said.

What are India’s growth metrics likely to be, going forward?

Economists have factored a lower growth for the September quarter at 6.5% compared to 13.5% in the June quarter.

But despite this slowdown, the Reserve Bank of India is still expected to deliver a 35 to 50 basis points (one bps is 0.01 percent) rate hike to manage inflation within the mandated band of 2-6%.

So, what is driving the RBI to keep interest rates at elevated levels?

The report says that higher than comfortable inflation numbers a weak rupee could also be a trigger to raise rates to attract foreign currency flows to stabilize the rupee, which has already lost over 10% in value so far this calendar year against the US dollar.

How has India done vis-a-vis other emerging markets as far as economic growth goes?

Even as the growth slows, India's economic growth rate is still better than emerging market peers giving the central bank more leeway to focus on inflation. Also, on a sequential basis, the December quarter GDP is likely to increase, reversing September quarter's contraction. A resilient domestic backdrop and pent-up demand continued to prop up India’s growth, the report says, citing analysts. 

Overall, a strong growth trajectory should support an RBI rate hike to contain inflation. We expect the MPC to deliver a 35bps rate hike at the December meeting, bringing the repo rate to 6.25% before it shifts to a neutral stance, the report goes on to add. 

But hasn’t inflation begun to moderate?

Even though October inflation numbers indicate some moderation in prices, a lot of the softening in prices is reckoned to be on account of base effect. Headline CPI is expected to remain above RBI’s upper threshold of 6%, in the remainder of FY'23 making case for a further rate hike.

"Base-effect played a major role in bringing down the year-on-year inflation rate in October. Indeed, if there was no base effect the October print would have been above 7% year-on-year, say analysts, according to the report.

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