The two key factors which the committee will deliberate intensely while firming up the next monetary policy are elevated retail inflation and the recent action taken by central banks of the developed nations especially the US Federal Reserve, European Central Bank and Bank of England.
The Reserve Bank on India (RBI) has been raising benchmark rates since May 2022 to contain inflation which has been largely driven by external factors, especially the disruption of the global supply chain following the outbreak of the Russia-Ukraine war.
In its last policy meeting held in February, RBI had raised the policy rate or repo by 25 basis points to 6.50 per cent.
Having remained below six per cent for two months (November and December 2022), the retail inflation breached the comfort zone warranting action by the Reserve Bank.
The Consumer Price Index (CPI)-based inflation was 6.52 per cent in January and 6.44 per cent in February.
“Given that CPI inflation has been 6.5 per cent and 6.4 per cent in the last two months and that liquidity is now near neutral, we may expect the RBI to raise rates once again by 25 bps and probably change stance to neutral to signal that this cycle is over,” opined Madan Sabnavis, Chief Economist, Bank of Baroda. India Ratings and Research Chief Economist D K Pant too expects the central bank to raise policy rate by 25 bps (basis points).
“This is likely to be last rate hike in present policy tightening cycle,” he said, and added that inflation trajectory from here is going to decline due to impact of past policy rate hikes, softening of global commodity prices, and base effect.
Meanwhile, Ranen Banerjee, Partner, Economic Advisory Services, PwC India, said that the risk of dis-anchoring the inflation expectations by going for a pause owing to the banking turmoil has forced the US Fed, ECB and BoE to raise the policy rates. The speech of US Fed chair clearly articulates that there is going to be less hawkishness going forward.
The case for disengagement of the Indian monetary policy moves with the US Fed has become stronger and the probability of a pause by the RBI on rate hikes has increased, he said.
“Given that inflation in India is more from supply side factors, as dissented by two of the MPC members in the last MPC meeting, we could possibly now have a majority of MPC members voting for a pause,” Banerjee said.
In all the Reserve Bank will hold six MPC meets in the fiscal 2023-24.
The central government has tasked the RBI to ensure that retail inflation remains at 4 per cent with a margin of 2 per cent on the either side.
On expectations from the April MPC meet, Suvodeep Rakshit, senior economist, Kotak Institutional Equities, said the RBI had been hawkish in the last policy and has consistently highlighted the concerns on elevated core and headline CPI inflation.
“With the ECB, BoE and the Fed sticking to their expected rate hike path, the RBI is likely to hike repo rate by 25 bps in the April policy,” Rakshit said.
Earlier this month, RBI Governor Shaktikanta Das said despite the multiple shocks to the global economy from the pandemic, the Ukraine war and synchronised monetary policy tightening across the world, the domestic economy and financial sector are stable and the worst of inflation is behind us.