Additional 75 bps rate hike likely between Aug-22 and Dec-22 policy meeting
Acuité continues to believe that interest rate increases by RBI will get front-loaded keeping in mind the elevated inflation risks in the near-term, fast evolving global monetary policy cycle and a weaker growth outcome anticipated in H2 vs. H1 FY23.
Acuité expects an incremental 60 bps - 75 bps hike in repo rate between Aug-22 and Dec-22. This will take the repo rate to 5.50% - 5.65% i.e. 35 bps-50 bps above the pre-pandemic level. The actual quantum of rate hike will however, depend on the inflation print and the growth indicators over the next 2 quarters. Post Dec-22, RBI may reassess the overall macro-economic scenario closely, with quantum of additional rate hikes dependent on the evolving growth-inflation dynamics.
Simultaneously, Acuité expects the central bank to continue to wean off excess liquidity from the system as core liquidity surplus remains close to 3.7% of NDTL as of mid Jun-22. This is relatively high compared to RBI's own estimate of 1.5% level being non-inflationary (as per the Currency and Finance report). For liquidity withdrawal, an additional CRR hike of 50 bps remains our base case in this fiscal year although alternate tools via FX intervention, sale of g-secs or issuance of short-term cash management bills can also be deployed to achieve the same objective.
Says Suman Chowdhury, Chief Analytical Officer, Acuité Ratings & Research "The minutes from the MPC members reflect a collective acknowledgement of the need for decisive frontloaded action and withdrawal of accommodation in the face of sharply increased inflationary headwinds. There is also a larger consensus that monetary policy actions should be supplemented with fiscal measures, wherever feasible to bring down the inflationary expectations. While RBI doesn't provide any glide path for policy rates as done by some central banks, we believe that the minutes provide a broad guidance for another 60-75 bps rate hike in the current financial year that is likely to happen by Dec-22. Importantly, further steps may be taken to absorb the excess liquidity in the system which may lead to a further increase in short term rates that have already seen a significant spurt over the last two months."