MUMBAI: With credit growth moving much faster than deposits, the Reserve Bank of India is expected to hike rates by 25 basis points this week, its last hike for the current economic cycle. The central bank will also need to raise rates to keep pace with global central banks as the US Fed, the European Central Bank and the Bank of England raised interest rates last month.
last month reserve Bank of India Governor Shaktin Das signaled a policy change with rates stable. “Central banks have begun what appears to be a pivot toward lower rate hikes or stagnation. At the same time, he reiterated his resolve to bring inflation closer to the target. Speaking at the bond dealers’ conference in Dubai on January 27, Das said higher policy rates for longer durations appear to be a distinct possibility going forward. The Governor will announce the Monetary Policy Committee’s decision on rates on 8 February.
According to Madan Sabnavis, Chief Economist, Bank of BarodaMonetary Policy Committee will continue with another rate hike to bring repo rate 6.5% for this cycle (from 6.25% currently) before the pause. The government’s decision to stick to fiscal consolidation will make the job of the MPC easier. “The government’s borrowing program is unlikely to put pressure on liquidity in an unusual manner as it has been maintained at FY23 levels. Deposit growth should be better, which should increase liquidity. Sabnavis said credit growth will also come down to a low of around 11-13% in FY24 due to the slowdown in the economy.
The year-on-year growth in bank credit is 16.5% as compared to 10% for bank deposits.
In the past, the RBI has said that it will take a few quarters for its rate hikes to have an impact. However, a 25-basis point hike is seen as a certainty as the 4% target is still far away with December inflation coming in at 5.72%. “With the 4% target not in sight, we expect RBI to hike rates by 25bp in the upcoming policy meeting, taking the repo rate to 6.5%. With growth slowing, we expect no future increases (though risks remain). And because core inflation is likely to remain high, we expect no cut in FY24 as well,” said Pranjul Bhandari, chief economist India, HSBC.
Barclays economist Rahul Bajoria agrees with the view that the MPC will hike rates by 25 basis points and this will be the last hike in this cycle. “We also think that it is likely that the policy stance will be changed to neutral from where it was in December 2018, when the repo stood at 6.50%. Besides, inflation has started moderating and is likely to decline further in the coming months.
last month reserve Bank of India Governor Shaktin Das signaled a policy change with rates stable. “Central banks have begun what appears to be a pivot toward lower rate hikes or stagnation. At the same time, he reiterated his resolve to bring inflation closer to the target. Speaking at the bond dealers’ conference in Dubai on January 27, Das said higher policy rates for longer durations appear to be a distinct possibility going forward. The Governor will announce the Monetary Policy Committee’s decision on rates on 8 February.
According to Madan Sabnavis, Chief Economist, Bank of BarodaMonetary Policy Committee will continue with another rate hike to bring repo rate 6.5% for this cycle (from 6.25% currently) before the pause. The government’s decision to stick to fiscal consolidation will make the job of the MPC easier. “The government’s borrowing program is unlikely to put pressure on liquidity in an unusual manner as it has been maintained at FY23 levels. Deposit growth should be better, which should increase liquidity. Sabnavis said credit growth will also come down to a low of around 11-13% in FY24 due to the slowdown in the economy.
The year-on-year growth in bank credit is 16.5% as compared to 10% for bank deposits.
In the past, the RBI has said that it will take a few quarters for its rate hikes to have an impact. However, a 25-basis point hike is seen as a certainty as the 4% target is still far away with December inflation coming in at 5.72%. “With the 4% target not in sight, we expect RBI to hike rates by 25bp in the upcoming policy meeting, taking the repo rate to 6.5%. With growth slowing, we expect no future increases (though risks remain). And because core inflation is likely to remain high, we expect no cut in FY24 as well,” said Pranjul Bhandari, chief economist India, HSBC.
Barclays economist Rahul Bajoria agrees with the view that the MPC will hike rates by 25 basis points and this will be the last hike in this cycle. “We also think that it is likely that the policy stance will be changed to neutral from where it was in December 2018, when the repo stood at 6.50%. Besides, inflation has started moderating and is likely to decline further in the coming months.