RBI May Defer Rate Hike to December, Total 75 bps Tightening Expected
Bank of Baroda Chief Economist Madan Sabnavis predicts the RBI might pause rate hikes until December, aiming for a total 75 bps tightening cycle.
The Reserve Bank of India (RBI) might opt for a cautious approach in its current policy review, potentially delaying any interest rate increases until December. According to Madan Sabnavis, Chief Economist at Bank of Baroda, the central bank is likely to pause its current stance before embarking on a tightening cycle that could total 75 basis points (bps).
Speaking to ANI, Sabnavis shared a "fairly contrarian" view, suggesting that the Monetary Policy Committee (MPC) may choose to wait for more definitive economic signals before making a move. The MPC is currently meeting from October 5 to 7, with the crucial policy decision expected on Wednesday.
Waiting for Inflation and Harvest Clarity
The primary reason for a potential delay, according to Sabnavis, is the need for greater clarity on several moving economic parts. He highlighted that the RBI needs to closely monitor:
- Inflation Trends: While the latest official inflation reading stands at 4.8 per cent, Sabnavis anticipates that inflation could surge past the 6 per cent mark in the coming months.
- Kharif Harvest: The outcome of the kharif harvest will play a vital role in determining food inflation and overall price stability.
- Liquidity Levels: The impact of surplus liquidity within the banking system remains a critical factor for the central bank to assess.
By deferring the hike until December, the RBI would gain a much clearer picture of the September and October inflation readings, as well as the final impact of the harvest season.
The Festive Season Factor
Timing is everything, especially when it comes to consumer behavior. Sabnavis pointed out that the onset of the festive season is a significant consideration for the central bank. Increasing borrowing costs during this period could dampen consumer sentiment and influence major household decisions, such as the purchase of automobiles and homes.
"I’m not saying I’m against the rate hike. In fact, I think we do require rate hikes, but probably the timing is something which could be deferred," Sabnavis noted.
Liquidity and Monetary Transmission
Another complex element in the RBI's decision-making process is the shifting landscape of liquidity in the banking system. While liquidity has dropped from approximately Rs 12 lakh crore to between Rs 5-6 lakh crore, there are expectations of an increase. Furthermore, FCNR deposits have provided banks with funds at rates between 6.5-6.75 per cent, reducing their reliance on more expensive funding markets like certificates of deposit.
Sabnavis warned that if the RBI moves too quickly, the monetary policy transmission—particularly regarding deposit rates—could become "very, very sluggish."
The Roadmap to 6 Per Cent
Looking at the broader trajectory, the economist envisions a structured tightening cycle designed to bring the repo rate to a terminal point of approximately 6 per cent. He predicts a sequence of three 25-basis-point hikes:
- December: The first hike to kickstart the cycle.
- February: A secondary increase to maintain momentum.
- Next Financial Year: A final hike at the beginning of the new fiscal period.
With inflation expected to hover around 5 per cent, Sabnavis believes a terminal repo rate of 6 per cent would result in a real interest rate of about 1 per cent, a level he considers reasonable for the current economic environment.