The Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) is expected to deliver another 25 basis points (bps) rate hike at the 6-8 February meeting, bringing the repo rate to 6.50%, with the need for larger hikes declining rapidly amid falling inflation and moderating imported price headwinds, said Barclays in a report.
The RBI’s MPC is scheduled to meet during 6-8 February, which will be the first this year. RBI Governor Shaktikanta Das will announce the MPC decision on Wednesday, the last date of the meeting.
The London-headquartered banks expects the February rate hike to be the last in this cycle, but also believe that it’s too early for the RBI to cut rates, as inflation is likely to be hovering around 5-5.5% by end of 2023, which may prevent an early reversal in rates.
The risk of a pause in February is low, but not zero
The bank said that the risk of a pause in February is low, but not zero. “Still, another rate hike is not a straightforward decision and is likely to be contested by at least two members of the MPC,” it noted.
With inflation reverting to within the central bank’s target range, Barclays said both Jayanth Varma and Ashima Goyal are likely to vote against a hike. “We would not rule out the prospect of Governor Das casting the deciding vote if the committee is evenly split,” it said.
However, the governor has been relatively hawkish in this cycle and may try to persuade the MPC to vote together, the bank stated.
India’s retail inflation cooled to a one-year low in December, staying below the RBI’s upper tolerance limit of 6% for the second straight month.
“Headline inflation back in the target range – and below the RBI’s projections – is increasing the room for dissent in the MPC, with at least two members likely to vote to keep rates on hold, in our view. This means the possibility of an on-hold decision is nonnegligible, but given elevated core CPI and recent comments by Governor Shaktikanta Das, we still believe a 25bp hike is the most likely step in February,” the bank said.
