Economists are unanimous in predicting that the central bank has no choice but to hike rates by 50 basis points next week and raise the terminal rate to 6.25% by December.
Economists from SBI, UBS, Goldman Sachs, Barclays and Bank of Baroda, in a rare unanimous call, see the RBI-led monetary policy committee hike 50 basis points on September 30, bringing the overall increase of the repo rate by 290 basis points to 5.90% since May this year.
Soumya Kanti Ghosh, chief economist at SBI Group, the country’s biggest lender, said in a detailed note on Monday that a half-percentage-point hike in the repo rate looks imminent in an aggressive response to external shocks.
“We expect the peak repo rate in the cycle to be 6.25%. A final rate hike of 35 basis points is expected in December,” he said.
Liquidity turned into a deficit after 40 months, which looks like another headwind for the central bank, he said, adding that it could force the RBI to support the market with a change in CRR and OMOs.
Echoing these views, Tanvee Gupta-Jain, chief economist at UBS Securities India, said in the base case scenario that she expects the MPC-RBI to preload the rate hike cycle and rise. the repo rate by another 50 basis points (from 35 basis points previously) next week, taking the terminal repo rate to 6.25% (previously 6%) by December.
On the positive side, she said the large current account deficit, high CPI inflation and a tight fiscal position are mainly due to supply-side factors rather than easy credit conditions which stimulate domestic demand.
Rahul Bajoria, the chief economist of Barclays India also raised the repo rate forecast to a 50bps hike next week (35bps previously) and a 35bps hike at the meeting. from December (25 basis points previously), with an upside risk to the forecast if commodity prices are higher in Q4.
“We now expect 50 basis points of further rate hikes in 2023 (75 basis points previously), which would take the repo rate to 6.75% by April 2023.”
The UK lender also expects the MPC-RBI to change its stance to neutral on falling commodity prices as it believes inflation has peaked. But we believe that tighter global financial conditions and high inflation will cause the MPC to stick to its predominant tightening cycle.
Madan Sabnavis, the chief economist at Bank of Baroda, also said that recent developments in the foreign exchange market may prompt a higher quantum of 50 basis points to stay on track with other markets to retain investor interest, as a 25 to 35 basis point hike would have signaled that the RBI is confident that the worst of inflation is over.
Goldman Sachs’ Santanu Sengupta also reported a 50bps hike (was 35bps) and a 35bps hike in December (was 25bps), with upside risk to the forecast if commodity prices are higher in the fourth quarter.
We now expect 50 basis points of further rate hikes in 2023 (75 basis points previously), which would take the repo rate to 6.75% by April 2023.