Don’t rule out a small rate hike in February

The Reserve Bank of India (RBI) has taken the policy rate to 6.25% (with an increase of 0.35 percentage points), a level last seen in March 2019, as it continues to fight inflation. RBI expects retail inflation to be 6.6% in the current quarter (Octoberdecember), and 5.9% in the next (January-march 2023), which would mean that the 2022-23 reading would be 6.7%, higher than the upper band of its comfort level (6%), and while the October print came in at 6.77%, some analysts expect it to rise again (marginally) or at least remain sticky in the coming months. October marked the 10th straight month in which inflation was higher than 6%.

The question now is whether the current rate-tightening cycle is over. There, RBI’S signals are mixed. RBI Governor Shaktikanta Das did say that the global economic scenario remains challenging, and RBI pruned its growth estimate for 2022-23, from 7% to 6.8% — and more pertinently, its growth estimates for the current quarter and the next to 4.4% and 4.2% from the 4.6% each projected earlier — but he also suggested that the revision was on account of global factors. And while its inflation estimates — 6.6% in the current quarter and 5.9% in the next; and 5% in the first quarter of 2023-24 (April-june 2023) and 5.4% in the second quarter — indicate that the situation may be coming under control, the central bank has also spoken of “firm” core inflation. Not surprisingly, the Monetary Policy Committee was divided. Five out of six voted to raise the policy rate; and four out of six, to remain focused on the withdrawal of accommodation while supporting growth. RBI’S message is clear: Its primary focus will remain on inflation, although growth (the primary challenges to which are external at this point), will remain on its radar. The message between the lines: A small rate hike in February can’t be ruled out.