Brace up for hike in key interest rates

Monetary Policy

- Growth recovery is still uneven

- Ongoing geo-political conflict, rising inflation, supply chain disruptions, high crude oil prices, and the pandemic in certain parts of the world impacting economy

- Higher inflation forecast likely

- High commodity, input prices and chip shortages a major cause of concern

Mumbai: Even as the Reserve Bank of India (RBI) is likely to maintain status quo on key policy rates when it reviews the rates in the MPC meeting being held during April 6-8, 2022, experts are of the firm belief that the rate hikes are the writings on the wall. Bizz Buzz gathered opinions from various experts on the topic.

Madan Sabnavis, chief economist, Bank of Baroda, says: "We would expect the MPC to review the earlier forecasts of both growth and inflation for FY23. Growth is likely to be revised downwards, while inflation would be probably at least 100 bps higher given the evolving conditions. Based on the commentary provided last time there would be a status quo position maintained on both the repo and reverse repo rates."

However, with inflation rising prodigiously, in my view there should be active consideration of change in stance from accommodative to neutral. This would signal to the market that there would be possible repo rate hikes in the coming months if inflation remains intransigent at the present level. There would also be some indication given on the currency in general terms of support like the swap operations which will assuage the market, he said.

With the Russia-Ukraine conflict causing further disruptions, RBI monetary policy on Friday is an important event to be watched out for. Growth recovery is still uneven due to the ongoing geo-political conflict, rising inflation, supply chain disruptions, high crude oil prices, and the ongoing pandemic in certain parts of the world.

Umesh Revankar, VC and MD, Shriram Transport Finance, says, "with the Russia-Ukraine conflict causing further disruptions, RBI monetary policy on Friday is an important event to be watched out for. While inflationary expectations have risen, downside risks to growth have emerged and hence, we expect RBI to keep key policy rates unchanged in April and maintain its 'accommodative' stance as long as necessary."

However, with the cumulative rise in price of fuel, it would be important to watch if the RBI revises the inflation forecast higher. Huge investments in capital expenditure announced in this year's Budget make us hopeful and optimistic. Demand conditions have improved slightly, we are seeing signs of recovery in the medium and heavy commercial vehicle (MHCV) segment, he added.

YS Chakravarti, MD & CEO, Shriram City Union Finance, says, "The rising inflation, while transitory and imported, will weigh on growth in the coming months. Growth has also faced setbacks due to high commodity and input prices and chip shortages—all of which do not hint

towards a smooth path, and are likely to delay spending and further hit business and consumer sentiment. RBI needs to continue to support small businesses and MSMEs, which are just starting to emerge from the pandemic-led slowdown. Demand for two-wheeler and retail or personal loans continues to outpace corporate demand, despite being below pre-pandemic levels, and low interest rates will help this trend sustain."

Ravi Subramanian, MD & CEO, Shriram Housing Finance, says that "the RBI's Monetary Policy Committee is likely to maintain status quo on key rates in the upcoming meeting."

Downward revisions to growth forecasts and upward revisions to inflation forecasts can be expected, as CPI breached the central bank's 2-6 per cent band in February. The MPC will support the nascent growth—which took a beating due to increasing commodity and input prices and chip shortages. The rising inflation presents a challenge to growth, and RBI's commentary on the same will be crucial and keenly eyed.

Lakshmi Iyer, chief investment officer (debt) & head (products), Kotak Mahindra Asset Management Company, says: "The RBI MPC meets at a time when outbreak of war has seen a spike in most commodities pack. Oil is on a boil, gold continues to sizzle, inflation is way too nimble. The growth – inflation debate is likely to hog centrestage yet again in the upcoming policy meet. While inflation guidance could see upward revision, we may not see any abrupt rise in benchmark rate."

While there is a chance that the RBI hikes reverse repo rate in the April policy, the market is unlikely to be much affected since effective rate is much higher that the reverse repo rate due to the VRRR operations. The RBI is likely to continue to signal its intent to support the government borrowing program though refrain from any explicit measures. For the April policy, we expect the RBI to start telegraphing its intent by being more concerned on the inflation outlook while keeping the stance and repo rate unchanged, she added.

Suvodeep Rakshit, Senior Economist, Kotak Institutional Equities, says, "While there is a chance that the RBI hikes reverse repo rate in the April policy, markets are unlikely to be much affected since effective rate is much higher that the reverse repo rate due to the VRRR operations."

The RBI is likely to continue to signal its intent to support the government borrowing program though refrain from any explicit measures. For the April policy, we expect the RBI to start telegraphing its intent by being more concerned on the inflation outlook, while keeping the stance and repo rate unchanged.