Inflation may force RBI to hike rate once again

Mumbai: It will be a catch-22 situation for India’s rate setting panel when it meets for three days — beginning on Monday — to decide on the benchmark interest rates in the country.

There are several factors such as the resurgence of food inflation in the last two months, core inflation that continues to remain sticky, the formation of adverse climate conditions that could affect mo-nsoon and a greater chan-ce of heat wave which put an upside risk to inflation in the coming months. On the other hand, slowing economic growth needs hand holding.

According to economists, the six-member Monetary Policy Committee of the Reserve Bank of India (RBI) may hike the repo rate (benchmark rate at which RBI lends to commercial banks)  by 25 basis points on Thursday  (April 6) and then take a pause. Some others, however, argue that the RBI could go for a pause.

With the real rate turning positive and tight liquidity conditions, some economists also expect a change of stance from ‘withdrawal of accommodation’ to neutral,
According to the minutes of the previous monetary policy meet in February, RBI governor Shaktikanta Das had favoured tapering the pace of rate hikes and had said that it would be premature to pause the rate hike given the uncertainty on the evolving inflation trajectory due to ongoing geopolitical tensions, global financial market volatility, volatile crude oil prices and also weather-related events.

Das had said that further calibrated monetary policy action is necessary in the MPC meeting to keep inflation expectations anchored and break the persistence of core inflation while containing second round effects.

The CPI (consumer price index) inflation in February eased slightly to 6.44 per cent from 6.52 per cent in January. However, it is still trending above the RBI’s upper end of the targeted 2 per cent to 6 per cent band. Food inflation at 5.95 per cent in February has been a concern. Core inflation continues to remain stubborn at six per cent. On the other hand, India’s GDP grew 4.4 per cent in the October-December 2022 quarter, slower than the 6.3 per cent growth in July-September 2022.

Since May 2022, the RBI has raised the repo rate by 250 basis points, from 4 per cent to 6.50 per cent.

Says Jahnavi Prabhakar, economist at Bank of Baroda, “The overshoot of CPI, mandates RBI to hike rate by another 25 bps in April 2023 meet and will push RBI to remain data dependent for the future course of action.”