RBI likely to raise rates in April, but will that be its last hike of cycle?

By India Today Business DeskThe Reserve Bank of India is likely to raise the repo rate by 25 basis points on April 6 as inflation continues to remain above its comfort zone of six per cent.

A poll of economists conducted by news agency Reuters indicated that the RBI would hike rates in the upcoming policy review and then pause for the rest of the year. But will that be the central bank’s last rate hike of the current cycle?

According to economists, it is likely that the central bank would leave room for future hikes, given the evolving inflation trend in India and around the globe.

Retail inflation above RBI’s comfort zone

Retail inflation has remained above the RBI’s upper tolerance band of 6 per cent for two straight months. While it reached 6.52 per cent in January, it only cooled off slightly to 6.44 per cent in February. This is why the central bank will hike rates again, at least till it manages to tackle the high core inflation.

A majority of the polled economists said the RBI would lift its repo rate by 25 basis points to a seven-year high of 6.75 per cent at its next monetary policy review in April. Another 25 basis point hike would take the cumulative hike since May last year to 275 basis points.

Also Read | RBI likely to hike 25 basis point interest rate in monetary policy meet, say experts

However, it is still relatively lower than the aggressive rate hikes carried out by central banks like the US Federal Reserve.

Options open for RBI

Vivek Kumar, an economist at QuantEco told the news agency that it is not just headline inflation, but even core inflation which continues to be a point of concern for the RBI’s Monetary Policy Committee.

“The Fed has done what it roughly telegraphed, and given that backdrop … we see no reason why the RBI should stay back, especially when inflation is running ahead of the upper end of the comfort band,” he said.

It is worth mentioning that a majority of the poll respondents told Reuters that the central bank would maintain its withdrawal of accommodation stance at the April review meeting.

“We expect no change in the stance. There is still a residual expectation of one more Fed rate hike in May. Until that is behind us, the RBI probably will not be very comfortable in signalling that they are done with rate hikes,” said QuantEco’s Kumar.

“With inflation a persistent concern, (the) RBI will likely keep all its options open to deal with the near- and medium-term inflationary risks,” noted Kaushik Das, chief economist, India and South Asia at Deutsche Bank.

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