RBI likely to hike repo rate by 25 bps in Feb, say economists

Bengaluru: The Reserve Bank of India (RBI) is expected to raise its main interest rate by a modest 25 basis points to 6.50 per cent at its meeting one week after New Delhi's February 1 budget, before leaving it at that level for the rest of the year, a Reuters poll of economists found.

Those forecasts were unchanged from a poll last month, with predictions for a slowdown in GDP growth to 6 per cent in the 2023/24 fiscal year from an expected 6.7 per cent in the current one also barely changed.

Like many other major central banks, the RBI is expected to then pause, waiting for inflation to fall before considering a shift toward a stimulative stance as Asia's third-largest economy slows.

More than three-quarters of economists, 40 of 52, expected the RBI to raise its key repo rate by 25 basis points to 6.50 per cent, according to a Reuters poll. The remaining 12 predict no change at the February 8 meeting.

The median forecast was for rates to remain at 6.50 per cent until the end of 2023.

"They (the RBI) need to pause at some point to see what exactly is the impact of the previous monetary tightening overall on growth and inflation. That is why I believe it is not premature for them to pause after 6.50 per cent," said Upasna Bhardwaj, chief economist at Kotak Mahindra Bank. "That doesn't mean they will leave the guards off the inflation focus."

The poll showed inflation, last reported at 5.72 per cent in December, was expected to average 5.0 per cent in the 2023/24 fiscal year and 4.9 per cent in 2024/25, well within the RBI's target band of 2 per cent-6 per cent after sitting above it for most of 2022.

In the last full budget before a 2024 general election, Prime Minister Narendra Modi's government is expected to focus on lowering the fiscal deficit rather than extra spending.

While the expected 6 per cent rate of growth is likely to be faster than many other economies around the world, it would still not be enough to generate the number of jobs required to lift hundreds of millions of Indians out of poverty.

A deteriorating global economic outlook also suggests downgrades to India's outlook are likely in coming months.