Economists at SBI on Monday said they expect the Reserve Bank of India (RBI) to hit the pause button on interest rate hike at its upcoming monetary policy review this week. The central bank's Monetary Policy Committee (MPC), the six-member rate setting panel, is likely to continue with the current 'withdrawal of accommodation' stance, the SBI economists said.
RBI Governor Shaktikanta Das-headed MPC started its three-day meeting on Monday and it will announce the decision on Wednesday.
"Even though RBI could pause as it allows past rate actions to work with long and variable lags, the RBI could still guide the markets with a rate action in future that will be purely data dependent," the note said.
Expecting headline inflation to decline closer to 5 per cent by March 2023 and further to 4.2 per cent in April, the economists said they expect a pause from the RBI at the next policy announcement and the present repo rate of 6.25 per cent will be the terminal rate. With the headline inflation coming below the 6 per cent-mark for the second consecutive month in December, a majority of economists are expecting a final hike of 0.25 per cent in the repo rates before the central bank opts for a longish pause.
The SBI note pointed out that going forward, the hikes by the US Federal Reserve -- which was one of the reasons that also forced the RBI to hike rates in the immediate past -- could also be smaller in magnitude. "This will keep the boil on emerging market central banks to follow Fed though markets seems to have largely become agnostic to macros globally... pause may be the new normal and markets will be happy to accept that... this will keep capital flowing into emerging markets," the note said.
However, it said that in an environment of rising rates, it is clearly not advisable to give forward guidance. It said there could be a gap of Rs 2 lakh crore between the demand and supply of government securities in FY24, and expected that this can be filled by RBI through OMOs (open market operations) or switches in the second half to balance supply demand dynamics especially if small savings collection does not pick up pace.
With the Reserve Bank flagging stress on the core consumer price inflation (CPI), it said goods core CPI is more volatile compared to services core CPI.
"We believe core CPI could gravitate towards 5.5 per cent or lower ...as headline CPI move towards 5 per cent in FY24," it add