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Will RBI hike repo rate by up to 25bps?

RBI discusses IT infra, new-age tech solutions with bankersThe Reserve Bank of India (RBI) is set to announce its monetary policy on February 8, 2023, and economists and BFSI stakeholders have mixed opinions on what to expect. Some believe the RBI may raise the repo rate by 25bps, while others expect a pause due to recent inflation prints and conservative borrowing projections. Some believe the central bank may revise its monetary stance to neutral, while others suggest a status quo policy may be more appropriate. Meanwhile, others see the RBI hiking the repo rate one last time to anchor inflationary expectations and stem capital outflows.

Nilesh Shah, Managing Director, Kotak Mahindra Asset Management CompanyCentral banks of the world are in admiration of the way RBI has navigated growth and inflation dynamics. The RBI has the luxury of raising rates or deferring it as inflation is cooling off and growth is stable. The market will be looking forward to the guidance on the borrowing program of FY 24.

Dr Soumya Kanti Ghosh, Group Chief Economic Adviser, State Bank of India: The near-term economic outlook remains highly uncertain, however, as myriad economic, financial, geopolitical and environmental risks persist. The outlook for global FDI in 2023 appears weak. Negative or slow growth in many economies, further deteriorating financing conditions, investor uncertainty in the face of multiple crises and, especially in developing countries, increasing debt-related risks will put downward pressure on FDI. India though bucks the trend. A nonsynchronous monetary policy action in 2023 by central banks across the world could thus materially result in lower volatility and financial stabilityAs the RBI mulls any further rate action on February 8, this could be set as a boundary condition of such a move. We believe Core CPI could gravitate towards 5.5% or lower in the interregnum, as headline CPI move towards 5% in FY24. The demand of securities from banks to be in line with the incremental supply (around Rs 5.9 lakh crore) to ensure LCR compliance. Insurance sector could subscribe to Rs 3.9 lakh crore. Good demand is also expected from other participants given expected growth in AUM. However, lower system liquidity, lack of additional HTM space, lower demand from the insurance sector could pose challenges to smooth conduct of borrowing program. Taking the demand from different participants into consideration, there could still be a gap of Rs 2 lakh crore between the demand and supply of securities. This could be filled by RBI through OMOs or switches in the second half to balance supplydemand dynamics especially if small savings collection does not pick up the pace. By March-end, we expect that the system might be in liquidity deficit within tolerable limits if there are no liquidity injection/ withdrawals. Rapidly tightening global financial conditions have exacerbated balance of payment and debt vulnerabilities in many developing countries.

Suman Chowdhury, Chief Analytical Officer, Acuité Ratings & ResearchThe decision of upcoming RBI MPC is unlikely to be based on consensus. While we believe there is a higher likelihood of a modest 25 bps (or even lower) hike in the repo rate, the probability of a pause has also increased due to the last two monthly inflation prints and the relatively conservative borrowing projections for FY24. The rationale for going for another round of hike is to anchor inflationary expectations, given that core inflation still continues to reign above 6%, and also stem the capital outflows which saw a spurt in Jan-23. While these data points may make it difficult for RBI to arrive at a decision, the prospects of a revision in monetary stance to neutral is strong.

Churchil Bhatt, Executive Vice President & Debt Fund Manager, Kotak Mahindra Life Insurance Company: The lagged impacts of past policy action are now beginning to influence both global and domestic growth-inflation dynamics. Energy prices and Rupee exchange rate are both well-behaved. Headline inflation remains within MPC target band and is likely to soften gradually going into FY24, aided by favourable base effects. Bond markets are already pricing in one final 25 bps rate hike going in this policy. However, we believe there is a case for MPC to deliver a status quo policy and resist from incremental policy tightening at this juncture. This in our view will be positive surprise for bond markets and may lead to moderate softening in yields.

Indranil Pan, Radhika Piplani & Deepthi MathewBusiness Economics Banking, Yes Bank: Central banks across the world are nearing the end of the rate hiking cycle. Given the strength in the labour markets and the consequent impact of the same on core services inflation, we see the US Fed hike two more times to bring the terminal rate to 5.00-5.25%. Based on our assessment of domestic growth-inflation dynamics, the RBI is expected to hike a last time on February 8 by 25bps. However, the stance of the monetary policy can stay unchanged for now. We expect the dollar to be relatively stronger in H2CY23 due to safe-haven demand as growth dynamics are seen to erode.

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