Monetary review: RBI may go for lower rate increase of 25-35 bps

New Delhi: After three back-to-back 50 basis points hike in interest rates, the Reserve Bank may opt for a lower rate increase of 25-35 bps in lending rates at its coming monetary policy review on Wednesday amid retail inflation showing signs of moderation and the need to push growth, according to experts.The Reserve Bank of India (RBI) will come out with its next bi-monthly policy review on December 7 at the end of the three-day meeting of the Monetary Policy Committee (MPC) beginning Monday.

In addition to the domestic factors, the RBI committee may also take some cues from the US Federal Reserve which hinted at a lower rate hike of 50 basis later in the month. In order to combat inflation, the Federal Reserve had earlier hiked the key interest rates four times by 75 basis points (bps) each.

The Reserve Bank since May has increased the repo or benchmark lending rates by 190 basis points, to calm down inflation which has remained above its comfort level of 6 per cent since January.

Madan Sabnavis, Chief Economist, Bank of Baroda, said the RBI will be presenting the monetary policy against the backdrop of GDP growth slowing down as well as inflation being high above 6 per cent.

"We do believe that the MPC will continue with rate hikes this time though the magnitude will be lower -- probably 25-35 bps. More specifically we do believe that the terminal repo rate for the financial year will be 6.5 per cent, which means there will be one more rate hike in February," he said.

Sabnavis further said there will not be any surprise for the market just as is the case for global markets too, which are now expecting more moderate increases in interest rates by the Fed.

The GDP growth in the second quarter of the fiscal slowed to 6.3 per cent as against a growth of 13.5 per cent in the preceding three months.

Consumer price index (CPI) based retail inflation, which the RBI mainly factors in while arriving at its monetary policy, is showing signs of modertaion but still remains above the central bank's upper tolerance level.

D K Pant, Chief Economist, India Ratings & Research, said the second quarter inflation and GDP numbers are in line with RBI's forecast.

"Inflation is likely to decline further. However, it is expected to remain higher than 6 per cent in this quarter. We believe RBI may go for a 25 bps hike in repo rate in December 2022 monetary policy," he said.

Shanti Ekambaram, whole-time director, Kotak Mahindra Bank, said the RBI has been keeping a close tab on growth and inflationary trends, and future action will be based on data prints on both growth and inflation.

"We expect a lower rate hike -- 25 to 35 bps -- from the RBI and MPC given the last lower inflation reading and a slight softening in Fed speak. As on expected lines, inflationary trends would start showing a decline in the fourth quarter of the current fiscal," Ekambaram said.

The RBI has been tasked to ensure the retail inflation remains at 4 per cent with a margin of 2 per cent. However, it failed to keep the inflation rate below six per cent for three consecutive quarters beginning January 2022. So it had to submit a report to the government detailing reasons for the failure to contain prices and remedial steps to rein in the price rise.

Dhruv Agarwala, Group CEO, Housing.com, too believes the central bank would go for yet another rate hike as the inflation targets remain elusive despite some reprieve on the price rise front.

Even though the quantum of the hike may be lower this time around, banks would have to eventually increase their interest rates, which will ultimately put upward pressure on mortgage rates, he said.

"While a slower GDP growth rate and rising interest rates are definitely worrisome for all industries, as far as the realty sector is concerned, there may be a short-term impact on the sector but its long-term growth remains intact," Agarwala said

On September 30, the RBI had hiked the key policy rate (repo) by 50 basis points with an aim to check inflation.

It was the third successive hike of 50 basis points (bps). Before the September hike, the central bank had raised the repo rate by 50 bps each in June and August, and 40 bps in May.

Retail inflation dropped to 6.77 per cent in October from 7.41 per cent in the preceding month, mainly due to easing prices in the food basket, though it remained above Reserve Bank's comfort level for the 10th month in a row.