RBI’s MPC could pause rate hikes in April to gauge the impact of hikes so far: SBI Research

• The Reserve Bank of India’s Monetary Policy Committee (MPC) could decide to pause rate hikes when it meets in April.
• A fall in affordable housing loans uptake and the banking sector crisis in the US and Europe could push the MPC to pause for the time being.
• A pause in rate hikes will be an “appropriate response”, according to analysts, who now expect the MPC to wait and gauge the full impact of the cumulative 250 basis point rate hikes in FY23.

The Reserve Bank of India’s Monetary Policy Committee (MPC) could decide to pause rate hikes when it meets in April, despite retail inflation persisting above its upper tolerance limit of 6%.

A fall in affordable housing loans uptake and the banking sector crisis in the US and Europe could push the MPC to pause for the time being.

While analysts earlier said that elevated inflation could push RBI to announce a 25 basis point hike in April, SBI Research suggests that core inflation is unlikely to fall to 5.5% due to post-pandemic shifts in healthcare and education expenditure.

“The RBI has enough reasons to pause in April. There are concerns of a material slowdown in the affordable housing loan market and financial stability concerns taking centre stage,” said a report by SBI Research.

Analysts at Nomura also underlined that their expectations of a rate hike have further decreased from 30% to 20%, despite a wider consensus about the April hike.

“We lower the probability of a hike to 20% (previously at 30%) and retain our baseline view of a pause at the April meeting (80% probability), against the consensus view of a 25 bps hike,” Nomura said in a note, adding that there could actually be rate cuts later this year to stimulate growth.

‘Worst of high inflation likely behind us’

Retail inflation, which surprisingly shot above RBI’s upper tolerance level of 6% in January this year, is expected to soften materially to 5.5-5.6% in March, and further to 4.7-4.8% in April. This is considerably below RBI’s 6% target.

Analysts at Nomura said they expect headline inflation to ease to 5.5% in March. Echoing similar sentiments, analysts at Motilal Oswal said there could be a further cool down later.

“Overall, the worst period of high inflation is likely behind us. We expect March inflation to come around 6% and to retreat toward 5% in the coming months,” said a Motilal Oswal report.

Core inflation remained sticky in February at 6.1% and has been above the 6% mark for 17 consecutive months. The long-term average of core inflation stands at 5.8%, and the post-pandemic expenditure shifts suggest that core inflation might not decline materially, SBI Research analysts said.

Dovish Fed should give RBI some breathing room

While Motilal Oswal continues to expect a 25 bps rate hike in April, SBI Research analysts say that a dovish Fed could give RBI’s MPC some comfort.

“The good thing is that a dovish Fed means a soft dollar and thus lower depreciation risk for the Indian rupee in the short to medium term,” the SBI Research report said.

Further, analysts also suggest that RBI will likely want to wait and watch the full impact of the cumulative 250 bps hike done in FY23 so far.

With inflation expected to trend downwards in March and April, and the RBI MPC expected to meet in June, the analysts at SBI Research suggest that the committee will have to strike a ‘delicate balance’ and a pause will be an ‘appropriate response’.

Further, SBI Research also used an artificial neural network model to construct multiple scenarios of terminal repo rates – in all the cases, the peak repo rate was between 4.79% to 6.27%, which is below the current repo rate of 6.5%.

Keeping these factors in mind, along with the volatile condition of the banking sector in developed markets, the MPC could wait and watch for developments on multiple fronts like inflation, growth and banking sector health before taking a decision on rate hikes.

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