Cooling prices give RBI room to slow interest rate hikes

 

• Reserve Bank of India Governor Shaktikanta Das will announce the rate decision through a webcast tomorrow at 10 am in Mumbai

India's central bank will likely begin to slow the pace of interest rate hikes on Wednesday, signaling it is nearing the end of its aggressive tightening cycle.

After raising rates by 190 basis points this year, including three half-digit steps, the six-member monetary policy committee led by Governor Shaktikanta Das has more than one reason to switch to smaller increments: high levels of inflation. Coming on and economically unfavorable. is growing.

Thirty-nine of 35 economists in a Bloomberg survey forecast the benchmark repurchase rate would increase by 35 basis points, three a quarter-point move, while one each proposed 10-, 30- and 50-basis-point actions. hopefully.

Das will announce the rate decision through a webcast at 10 am in Mumbai on Wednesday and address a press conference at 12 noon.

Here's what else to watch:

peak rates

Analysts will be keenly watching for any signs of the beginning of the end of the rate hike cycle. US Federal Reserve Chairman Jerome Powell has already signaled a down-shift, which is a source of comfort for Indian policymakers.

Bond market traders, in particular, will interpret a soft tone as a clear indication that rates are rising. Fall in commodity prices and lack of demand can provide relief.

"The pace of rate hikes will slow down as external constraints ease significantly following the recent sell-off in the dollar, oil prices and the US Fed's small rate hike," said Dheeraj Nim, economist at ANZ Group. It will be important to examine the language of the Monetary Policy Committee's stance as "both nominal and real policy rates are now entering growth-restricting territory."

While most economists expect the RBI to go for another rate hike in February, Sajid Chinoy of JPMorgan Chase & Co said December's 35 basis point hike could be the last in the cycle.

attitude change

However, economists seem to differ on the likelihood of a change in stance. Chinoy said the stance may remain unchanged on "pulling back the accommodation" while maintaining a cautious tone.

But others believe the change in stance could offer the RBI the flexibility to scale its actions based on incoming data. "We expect a unanimous MPC vote to change the policy stance from accommodative to neutral," said Abhishek Gupta of Bloomberg Economics.

growth-inflation

The governor's approach on the growth-inflation trade-off will also be closely watched, especially after Finance Minister Nirmala Sitharaman said economic expansion was now a top priority for the government.

Global headwinds will be a major risk to next year's growth outlook, said Kaushik Das of Deutsche Bank AG, adding that he does not expect rate hikes to continue beyond the December policy. The bank expects the RBI to keep its inflation and growth projections unchanged at 6.7% and 7%, respectively, for the fiscal year ending March.

The RBI may also lay out a roadmap to bring down inflation broadly, even as it declined to discuss details of the letter it wrote to the government, stating that it will keep its 2%-6% target for three consecutive quarters. Why it failed to keep inflation within the % target band.