Analysts see policy rate crossing 6% this fiscal

Economists and analysts expect the Reserve Bank's monetary policy committee to continue with rate hikes till the policy rate reaches the neutral rate of 6-6.5 per cent by the end of this fiscal. The MPC on Friday delivered the third straight rate hike since May with an increase of 50 basis points in the latest round. Now, the repo rate is at 5.40 per cent, which is above the pre-pandemic level. The key rate was at 5.15 per cent in February 2020.
"We believe that the current policy rate hike cycle is expected to continue till the Reserve Bank of India reaches what is known as 'neutral policy rate'," Sunil Kumar Sinha, the Principal Economist at India Ratings, said.

According to him, neutral policy rate is the short term policy rate that is expected to stabilise the economy in the long run by letting the economy realise its growth potential but keep the inflation within the target range and inflationary expectation well anchored.

Under the current macro environment, "we reckon this neutral policy rate to be in the range of 6-6.5 per cent," he added.

He also pointed out that future rate hikes besides guided by the evolving geopolitical situation would also be data-dependent.

Swiss brokerage UBS Securities said it expects the MPC to raise the repo rate further to 5.75 per cent by the end of FY23. Going forward, rate hikes would be data-dependent, considering the uncertainties remain high on both growth and inflation outlook, it added.

Tanvee Gupta-Jain, UBS Securities India Chief Economist, has based her more rate hike calls to the widening current account deficit which is likely to be 3.5-4 per cent of the GDP in the first half of this fiscal.

Rahul Bajoria, Chief Economist at Barclays India, said he sees another 50 bps hike by December and noted that the policy significantly focuses on the external position.

Radhika Rao, the Senior Economist at Singaporean lender DBS, said with inflation likely to stay above the target into early FY24, more hikes are on the cards and expects a 75 bps more hike by March as the current level is already at par with the Q3 of FY19.

The tone of inflation assessment was cautious emphasising the "unacceptable" and uncomfortable prevailing levels, as the RBI has highlighted the risk that sustained high inflation could destabilise inflation expectations and harm growth in the medium-term, she said.

"We maintain our call for at least another 75 bps hikes by March 2023, subject to inflation nearing its peak in 2QFY23 and gradually easing below 6 per cent in the March quarter," Rao said.

Dharmakirti Joshi, the Chief Economist at Crisil, said the MPC has increased the rate by more than 25 bps compared to the pre-pandemic level means how it sees the price pressures are unfolding.

The frontloading of the repo rate hike was needed as inflation, despite some softening, is still way above the upper tolerance limit and monetary policy impacts it with a lag, he said.

According to Joshi, the third rate hike in the current fiscal also partly addresses spillover risks from an aggressive stance of the US Federal Reserve and other systemically important central banks.