RBI may keep repo rate unchanged for now, hike from Dec: Economist

Bank of Baroda Chief Economist Madan Sabnavis said the RBI may keep the repo rate unchanged in its ongoing policy review and start raising rates from December, waiting for more clarity on inflation, the kharif harvest, and surplus liquidity.

The Reserve Bank of India may keep the repo rate unchanged in its ongoing policy review and start raising rates from December, with a total increase of 75 basis points, Bank of Baroda Chief Economist Madan Sabnavis said. He said the RBI may wait for more clarity on inflation, the kharif harvest and the impact of surplus liquidity before raising rates.

Speaking to ANI, Sabnavis said his view was “fairly contrarian” as he expects the central bank to defer the rate action by one policy. The RBI’s Monetary Policy Committee is meeting from October 5 to 7, with the policy decision due on Wednesday, amid concerns over rising inflation and global uncertainty.

Rationale for a Pause

“The RBI may take a pause for one more policy and then bring about a rate hike from December onwards,” Sabnavis said. He said the economic conditions have not changed significantly from August, when the MPC had decided to wait despite expectations of higher inflation in the coming months.

The latest official inflation reading is 4.8 per cent, while Sabnavis expects inflation to cross 6 per cent in the coming months. He said waiting until December would give the RBI a clearer picture of the kharif harvest and inflation readings for September and October.

The beginning of the festival season is another reason for the central bank to defer a rate increase, he said, as higher borrowing costs could affect household decisions on purchases of automobiles and houses. “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 said.

Liquidity and Policy Transmission Concerns

Another factor is surplus liquidity in the banking system, which he said has declined from around Rs 12 lakh crore to Rs 5-6 lakh crore, but is expected to increase again. FCNR deposits have also provided banks with funds at around 6.5-6.75 per cent, reducing their need to seek funds through the certificate of deposit and bulk deposit markets.

Sabnavis said this could make monetary policy transmission, particularly on the deposit side, “very, very sluggish” if the RBI raises rates immediately.

Projected Rate Hike Cycle

For the broader rate cycle, he expects three 25-basis-point hikes — in December, February and the beginning of the next financial year — taking the repo rate to around 6 per cent. “We do feel that from a 25 basis hike in December, followed by one in February, and then probably one in the beginning of the next financial year, a total rate hike of 75 basis points to take the repo rate to something like 6% at a terminal point,” he said.

With inflation at around 5 per cent, he said this would imply a real interest rate of around 1 per cent, which he considers reasonable for current conditions. (ANI)

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