RBI Likely To hike Rates By 25 Basis Points This Week

The RBI is likely to deliver a 25ps hike this week. We expect the MPC to also ease its pace of rate hikes further and deliver 25bps in February after 35bps in December (total repo hike of 225bps and effectively 335bps so far). The smaller pace of hikes will be driven by:

(1) Slower hikes globally, giving a breather to Asian central banks, even as Fed repricing needs a watch.

(2) Inflation likely to ease ahead, especially as volatile food prices have declined faster than expected, and headline CPI is largely expected to remain sub-6% through FY24

(3) The need to assess monetary-policy lags of the hikes so far, and,

(4) Capex thrust-led fiscal consolidation to improve potential growth, while adhering to medium-term fiscal sustainability

...but will likely still sound cautious and data dependent

That said, near-term inflation (both headline and core) could again likely be printing above 6%. We note core inflation is becoming a key headwind for the RBI. The policymakers have been vocal about their concerns with its stickiness - and the risk that sustained high inflation could unmoor inflation expectations and lead to second-round effects in the medium term. Indeed, core inflation has been nearly constant at 6.2-6.3% for eight months now - this after easing to 6.2% in May-22 from April's peak of 7.4%, which was partly due to a high base. The still resilient demand is partly keeping the core sticky. Even as core inflation will likely slow in the coming months, it will possibly print higher than the headline. For FY24, we see core inflation remaining sticky for some time and gradually declining to average 4.9-5.0%. Lower imported inflation, slower demand amid monetary transmission, and base effects should directionally imply lower headline and core inflation in FY24. We expect FY24 headline inflation to average 5.1-5.2% and expect the RBI to mildly revise down its inflation forecast. Additionally, with monetary conditions still accommodative compared to pre-Covid levels, the RBI's tone will remain generally cautious and data-dependent and that the MPC will maintain its "withdrawal of accommodation stance," even as it acknowledges the recent pace of policy tightening.

(Taken from a report by Emkay Global)