Expect 50-75 basis points repo rate hike in fiscal 2023: Dharmakirti Joshi, Chief Economist, CRISIL

8 Apr 2022 , 03:29 PM

The Reserve Bank of India (RBI), while keeping repo rate unchanged at 4%, sounded more hawkish in today’s monetary policy meeting. While maintaining an accommodative stance, it has signaled calibrated removal of accommodation in this fiscal going forward.

The central bank had already begun normalising its policy last fiscal by absorbing excess liquidity through variable rate operations. During Friday’s policy review, it took a concrete step by restoring the policy rate corridor under liquidity adjustment facility (LAF) to pre-pandemic width of 50 basis points by introducing standing deposit facility (SDF) at 3.75 as the floor of this corridor. This was imminent given the sharp rise in inflationary pressures.

The RBI has thus signaled shifting focus from reviving growth to mitigating inflation risks. Upside risks to inflation show no signs of abating, with crude oil prices persisting above $100 per barrel, and food and metal prices at record highs. Along with increasing cost pressures, we expect the pressure on consumer prices to broaden as well this fiscal.

Last fiscal, CPI inflation was mainly contained on account of low food inflation (helped by favourable base effect) and limited passthrough of cost pressures to core inflation (amid weak demand).

We believe both these factors are set to change this fiscal. Food inflation faces upside risks from surging international food prices and input costs for agriculture. Core inflation is also expected to rise above 6% as producers increase passthrough of input costs amid improving demand conditions.

The RBI will also need to mitigate the reverberations from volatile global financial conditions, considering tightening monetary policies by major central banks and heightened geopolitical tensions. S&P Global expects six more rate hikes by the US Federal Reserve in 2022 calendar year, which will include a 50 bps hike.

While low vulnerability and adequate foreign exchange reserves have cushioned the impact of external shocks on India so far, it is certainly not immune if these shocks rise further. India’s vulnerability also hinges on crude oil prices, as it impacts India’s major macros including GDP growth, inflation, current account deficit, rupee and in some cases, the fiscal deficit.

The change in tone in today’s meeting, and narrowing of LAF corridor will prepare the markets for repo rate hikes, which we expect to be 50-75 basis points in fiscal 2023, beginning with the June monetary policy review. The pace of tightening will be guided by the surprises emanating from inflation and external risks.