Economists maintain back-to-back repo rate hike stance

Economists expect the Reserve Bank of India to consider another 50-basis-point repo rate hike in December amid rising inflation risks and rupee weakness. October MPC minutes indicated a hawkish policy shift, while elevated bond yields and currency movements reflect market uncertainty

New Delhi: Economists on Thursday maintained back-to-back repo rate hike stance, as the RBI MPC minutes for October revealed more hawkish tone, inclining towards future risk and policy tightening.

A report by SBI Research said that it continues to maintain 50 bps rate hike in December, either through a “plain vanila” 50 bps repo rate hike or an “exotic” 50 bps rate hike with a 25-bps repo rate and a 25-bps asymmetric widening of the Liquidity Adjustment Facility (LAF) corridor (MSF at 6.25 per cent and SDF at 5.50 per cent). “The broadening of inflationary pressures, alongside persistent rupee weakness, calls for close monitoring by the RBI and a calibrated policy response to contain inflation risks and reinforce monetary transmission,” said Dr Soumya Kanti Ghosh, Group Chief Economic Adviser, State Bank of India.

---

“We expect the peak inflation rate by November below 6.5 per cent and with these elevated levels, such generalisation warrants close monitoring by the RBI,” Dr Ghosh added.

According to Radhika Rao, Senior Economist and Executive Director, DBS Bank, the minutes from the RBI’s October rate meeting reflected the hawkish pivot, where the repo rate was raised by 25 bp and stance was changed to ‘calibrated tightening’. “Members cited rising inflationary pressures and firm growth as reasons behind the 25bp hike. Tone of the commentary put two external members in the most hawkish camp, as they emphasised the broadening inflation risks and need for pre-emptive action, while two others were considered mildly hawkish/neutral as they supported only incremental hikes and explicitly rejected signalling a prolonged tightening cycle,” she explained.

The RBI Governor Sanjay Malhotra highlighted emerging signs of inflation becoming more generalised. With inflation set to rise to 6 per cent in CY Q4, “the door remains open for a back-to-back hike in December,” said Rao.

In markets, bond yields stayed high, while the rupee was appreciated due to forex regulatory measures. As restrictions gained traction, the rupee has strengthened by around 1.5 per cent/USD this month, defying the usual headwinds from rising oil prices and subdued global risk sentiment, while FX forward premiums remain elevated. Inflows towards the country’s biggest-ever equity IPO also contributed to forex gains, said economists.

For now, the currency is exhibiting limited reaction to external developments, while bonds are set to remain under pressure as oil supply fears return to the table, said Rao.