RBI MPC likely to hike but may not say it’s done with hikes yet

A rate hike from RBI looks a certainty mainly because the February CPI was way above RBI and market expectation. Also, since April 1, prices of milk, electricity tariffs and crude have only gone up. While there is no panic about the rabi harvest, there are some worries that the February heat wave and the March and now April rains may reduce the harvest a bit. A feared El Nino may hamper the next kharif, though some say the government’s open market sales of wheat and rise to cool prices may also trigger lower kharif sowing.

All told, CPI in the just-concluded quarter will come in much higher than RBI’s forecast of 5.7%. Also, the 5% CPI forecast for the current April-June quarter also has an upside risk from milk and electricity prices.

The other reason why the market is betting on the hike on April 6 from the MPC is that the RBI sounded extremely bullish on growth in its “State of the economy” chapter in the March bulletin. The RBI expects tax cuts for the upto-7 lakh rupees income category to put more money in the hands of tax payers, which should lead to more consumption and hence more demand led growth.

Also read: RBI expected to deliver 25 bps hike on April 6, rate cut by December 2023

As if to buttress RBI’s confidence on the growth of the economy, the March GST data reflecting February consumption has come in strong at Rs 1.6 trillion, the second highest monthly collection so far. Backed by this confidence about the growth of the economy, RBI may lead the MPC to another hike.

However on future guidance the RBI faces some uncertainties. It may be good to say it is done with rate hikes, given that inflation and  growth will mostly slow in the coming months due to global headwinds. Several experts and policy makers including the US Fed point out that the recent banking crisis in the US is likely to result in risk-averse bankers that will constrain credit.

Job cuts by a slew of US tech companies are also expected to slow consumption as would the 475 basis points of rate hikes already announced by the Fed in the past one year. Similar credit tightening is likely to slow the European economy too. China is doing better after last year’s debilitating Covid restrictions were removed.

But all told, global headwinds are likely to keep growth softer than in FY23. RBI’s GDP forecast for FY24 at 6.4% is much higher than that of most economists who see growth struggling to reach 6%. Given these fears over growth, RBI may be right to hint that it is ready to pause the rate hiking cycle for now.

Yet RBI may want to retain the option of one more hike if the situation warrants. A clear neutral stance may be taken to mean that the next step is a rate cut. That RBI may want to discourage. The RBI members in the MPC have always reminded that CPI is way above the MPC’s target of 4%.

As already pointed out, the situation is worrisome on the food front and the latest worry is the crude output cut announced by the OPEC. Brent crude prices have jumped 5% over the weekend. This itself won’t lead to higher fuel prices in India, because Indian oil refining companies didn’t lower prices when crude prices fell. The worry about higher crude prices is that it can push up global inflation which in turn can seep into India.

Given the clear uncertainty over inflation, RBI may want to keep  its options open. It may caveat its neutral stance, as Sajjid Chinoy said, by hinting at a long pause and the possibility that it may jump either way (hike or cut) depending on incoming data.

Also read: RBI Monetary Policy: From Adani Group to bank lending and deposit rates, highlights from RBI press conference