Economists Predict Continued Repo Rate Hikes Amid Inflation Concerns
Economic Outlook and Repo Rate Predictions
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New Delhi, Oct 22: On Thursday, economists reiterated their expectation for consecutive increases in the repo rate, following the Reserve Bank of India's (RBI) Monetary Policy Committee (MPC) minutes for October, which indicated a more aggressive stance towards future risks and policy adjustments.
A report from SBI Research forecasts a 50 basis points (bps) rate hike in December, which could occur through a straightforward 50 bps increase or a more complex approach involving a 25 bps hike alongside a 25 bps asymmetric widening of the Liquidity Adjustment Facility (LAF) corridor, setting the Marginal Standing Facility (MSF) at 6.25% and the Standing Deposit Facility (SDF) at 5.50%.
Dr. Soumya Kanti Ghosh, Group Chief Economic Adviser at the State Bank of India, noted that the expanding inflationary pressures and ongoing weakness of the rupee necessitate vigilant monitoring by the RBI and a measured policy response to mitigate inflation risks and enhance monetary transmission.
Dr. Ghosh anticipates that peak inflation will remain below 6.5% by November, emphasizing the need for the RBI to closely observe these elevated levels.
Radhika Rao, Senior Economist and Executive Director at DBS Bank, remarked that the RBI's October meeting minutes reflected a hawkish shift, with a 25 bps increase in the repo rate and a change to a 'calibrated tightening' stance.
She explained that committee members cited increasing inflationary pressures and robust growth as justifications for the 25 bps hike. The commentary indicated that two external members were particularly hawkish, stressing the need for proactive measures against inflation risks, while two others were more neutral, advocating for only gradual hikes and dismissing the idea of a prolonged tightening cycle.
RBI Governor Sanjay Malhotra pointed out emerging trends indicating that inflation is becoming more widespread. With inflation projected to reach 6% in the fourth quarter of the calendar year, Rao noted that the possibility of another rate hike in December remains open.
In the financial markets, bond yields remained elevated, while the rupee appreciated due to regulatory measures in the foreign exchange market. The rupee has strengthened by approximately 1.5% against the dollar this month, despite typical challenges from rising oil prices and a cautious global risk sentiment, with foreign exchange forward premiums still high.
Economists also mentioned that inflows from the country's largest-ever equity IPO have contributed to the forex gains.
Currently, the currency shows limited responsiveness to external factors, while bond markets are likely to face pressure as concerns over oil supply resurface, according to Rao.