RBI Likely to Cap Rate Hike at 5.75% Amid Inflationary Pressures
Deloitte’s Rumki Majumdar predicts RBI may cap the repo rate at 5.75% to combat inflation driven by food and oil prices.
The Reserve Bank of India (RBI) is expected to halt its current tightening cycle once the repo rate reaches 5.75 per cent, maintaining this level for an extended period to combat persistent inflation. This projection comes from Rumki Majumdar, Director and Chief Economist at Deloitte India, who suggests that elevated food and oil prices will continue to drive inflationary pressures.
Inflationary Drivers: Food and Oil
According to Majumdar, the central bank's decision-making process will be heavily influenced by upcoming inflation data. The timing of any further rate hikes depends significantly on the inflation prints for October and November. The RBI is expected to assess these figures before deciding whether to implement another hike in December or defer the move.
Several factors are keeping inflation high:
- Food Prices: While a potential easing is expected as El Nino effects subside and crop output improves, food prices are expected to remain elevated for some time.
- Oil Prices: Global supply disruptions around the Hormuz and Bab el-Mandeb routes are likely to keep oil prices high.
- WPI Inflation: Wholesale Price Index (WPI) inflation has remained near the 10 per cent mark for four consecutive months.
Prudent Moves and Economic Stability
The recent 25-basis-point hike by the RBI was described by Majumdar as a prudent and pre-emptive measure. This move was necessary to address a combination of rising inflation, pressure from Western central banks, capital outflows, and the depreciation of the rupee.
Controlling inflation remains a priority as it directly impacts household purchasing power and future consumer spending decisions. Majumdar noted that while the tightening may feel restrictive, it is essential for long-term economic stability.
Impact on Markets and Consumption
The shift in interest rates is expected to have ripple effects across various sectors of the Indian economy:
Bond Yields and the Rupee
Indian government bond yields are expected to rise gradually, with the 10-year yield already hovering around 7.1-7.2 per cent. Majumdar suggests that higher yields are beneficial as they help maintain India's risk premium, which can attract capital and help balance the pressure on the rupee.
Consumer Spending and Sensitive Sectors
Despite the higher interest rate environment and food inflation, there is no significant expectation of a slowdown in festive consumption. Majumdar believes strong consumer spending, supported by the RBI's pre-emptive actions, will keep spending "more expansionary than conservative."
However, interest-sensitive sectors like automobiles and real estate may feel the impact with a time lag as banks gradually adjust their lending rates. In response to these changes, consumers are expected to become more mindful, potentially opting for fixed-rate loans and more attractive bank deposits. Strong credit growth is expected to act as a cushion during this transition.