More RBI rate hikes coming, SBI wants ‘jumbo’ 50 bps increase by December

Given that global conditions are likely to turn volatile soon, the window of opportunity of RBI rate hike in small increments must be avoided, said Soumya Kanti Ghosh, State Bank of India’s Group Chief Economic Adviser. (File photo)

The Reserve Bank of India’s Monetary Policy Committee is widely expected to keep increasing interest rates in the coming months after kicking off the tightening cycle on Wednesday, with Soumya Kanti Ghosh, State Bank of India’s Group Chief Economic Adviser, calling for a 50-basis-point hike either in the December 2–4 meeting or even before that.

“Given the steepening inflation trajectory currently underway, we believe that the December policy cycle could mostly deliver a jumbo 50 bps rate hike depending on the global conditions,” Ghosh said in a report. “Given that global conditions are likely to turn volatile soon, the window of opportunity of RBI rate hike in small increments must be avoided. A 6% repo rate by December could be the best possible option.”

According to SBI’s estimates, headline retail inflation may peak at 6.8% in November, data for which will be released around a week after the MPC announces its next interest rate decision.

Rate cuts ‘off the table’

On Wednesday, the MPC raised the repo rate for the first time in over three-and-a-half years, with its 25-bps increase taking the policy rate to 5.5%. The committee also made its ‘stance’ more restrictive, changing it to ‘calibrated tightening’ from ‘neutral’, which means “rate cuts are off the table in the near term and policy action ahead can only be a rate hike or a pause, depending on the evolving conditions and the outlook”.

The central bank also raised its inflation forecast for the current fiscal to 5.2% from 5%, peaking at an average of 6% in the October–December quarter. The MPC also noted that there is “some evidence of elevated inflation expectations and generalisation of inflation”, marking a departure from its assessment in August that there were “little signs of generalisation of price pressures so far”.

25 bps hike in December?

SBI’s Ghosh is in the minority with his call to increase the repo rate by 50 bps on December 4 or even before that. A snap poll of 15 economists showed the consensus view is for two more rate hikes of 25 bps each – amounting to a 50 bps rise in the repo rate – over the next six months or so.

Economists widely expect the MPC to raise the repo rate by another 25 bps to 5.75% in December. Some, such as HSBC economists led by Pranjul Bhandari, continue to predict only one more rate hike of 25 bps later this year.

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“Yes, there is risk of another, especially if growth remains resilient despite a strengthening El Niño. But for now, we don’t see this as a deep rate hiking cycle,” they said. “Implicit in this is our belief that interest rate hikes are not being prioritised to shore up the INR. Instead, they are being used for lowering inflation (which in turn, may have a positive impact on the INR).”

The rupee took a turn for the worse on Wednesday, closing at 96.78-per-dollar after having fallen as low as 96.86 – not far from its all-time low of 96.96. Responding to a query on the exchange rate at a press conference, Governor Sanjay Malhotra said financial markets could be “irrational” in the short term, with some indicators suggesting the rupee was undervalued.

More than 2 rate hikes?

A small number of economists also see the repo rate being raised by another 75–100 bps.

According to Suyash Choudhary, Bandhan Mutual Fund’s Chief Investment Officer of Fixed Income, the current global macro environment is “exceptionally hawkish” for a country such as India that imports energy, maintains a current account deficit, and needs its “fair share” of dollar inflows.

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“In the present case higher global real yields and broad-basing commodity pressures provide limited degrees of freedom for RBI. Our view is of total rate hikes of 100–125 bps including the one done today,” Choudhary added.

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Siddharth Upasani is a Deputy Associate Editor with The Indian Express. He reports primarily on data and the economy, looking for trends and changes in the former which paint a picture of the latter. Before The Indian Express, he worked at Moneycontrol and financial newswire Informist (previously called Cogencis). Outside of work, sports, fantasy football, and graphic novels keep him busy.   ... Read More