RBI Monetary Policy Preview: An Impending Hike

From the Monetary Policy Committee’s last meeting in August to the one scheduled on Sept. 30, a lot has changed.

Retail inflation has picked up. Economic growth has missed estimates. Brent crude has eased. Liquidity has seen a sharp fall. And the rupee has depreciated past 81 against the U.S. dollar.

That has reaffirmed economists’ prediction of another rate hike—the fourth in a row this year—as the Reserve Bank of India’s six-member panel is set to meet for its penultimate review in 2022.

A Bloomberg poll of 26 economists shows a median forecast of 5.9%. The policy repo rate is currently at 5.4%.

“Falling commodity prices offer some relief, but we think tighter global financial conditions and high inflation will lead the MPC to stick to its front-loaded tightening cycle,” said Rahul Bajoria, chief economist at Barclays, who forecasts the central bank to hike the benchmark rate by 50 basis points and change its stance to ‘neutral’.

Soumya Kanti Ghosh, group chief economic advisor at the RBI, said with liquidity in a deficit mode, the RBI may carefully calibrate its statement given that government cash balances is still at record highs.

A hike at the September policy meeting, Bajoria said, should bring real rates in India, on an ex-ante basis, closer to desired levels, warranting limited further actions. The transmission of rate hikes undertaken since April has been satisfactory, hence the MPC might opt to pause after next week’s meeting to observe the impact of past rate actions on growth and inflation before contemplating further moves, he said.