The Reserve Bank of India is expected to pause repo rate hike in April after six consecutive increases starting with an off cycle rate hike in May last year, State Bank of India's research arm SBI Research said in a report titled “Prelude to MPC Meeting”. The research arm of the country's largest bank however expects the central bank to continue with its policy stance of "withdrawal of accommodation."
"Latest data suggests that bank borrowings from the recently announced Fed Bank Term Funding Programme /BTFP & FHLB window reveal that fears of a greater bank contagion is receding, though deposits of small banks continue to decline at expense of larger banks. Smaller banks seem to be borrowing from Fed to overcome any deposit run. Thus, global conditions are still evolving and fluid. We believe at 6.50%, it could be the terminal rate for now...," SBI Research said in its report.
SBI Research added that RBI can continue with withdrawal of accommodation stance as liquidity is now in deficit mode. It added that the central bank has enough reasons to pause in April as there are concerns of slowdown in affordable housing loan market and financial stability concerns taking centre stage.
"While concerns on sticky core inflation is justified, it may be noted that average core inflation is at 5.8% over the last decade and it is almost unlikely that core inflation could decline materially to 5.5% and below as post pandemic shifts in expenditure on health and education and the sticky component of transport inflation with fuel prices staying at elevated levels will act as the constraint. By this logic, RBI may then have to go for more round of rate hikes," SBI Research said.
The RBI's Monetary Policy Committee (MPC) has so far increased repo rate by 250 basis points since May in its fight against stubborn inflation, which came in at 6.44 per cent in February, and has been above the higher end of the central bank's target range of 2-6% for large part of the current financial year.
Meanwhile, highlighting on the resilience of Indian banking system, at a time when there is a banking crisis in developed markets, SBI Research said foreign claims on India are $104.2 billion on immediate counterparty basis, and $81.5 billion as guarantor basis. When compared with other major countries, India has least foreign claims, both as counterparty basis, and also as guarantor basis.
"Further, our ratio of Foreign claims to Domestic claims is also least among countries signifying that our banking and financial system is very disciplined, and no international balance sheet contagion can start from India," SBI Research added.
