RBI MPC meet: Will it pause or hike repo rate by 25 bps?

According to Pankaj Pathak, Fund Manager- Fixed Income, Quantum AMC, inflation has come down substantially over the last three months and showing further downward momentum. External conditions have also eased with slower rate hikes in the US. RBI’s foreign exchange reserves have also increased over the last few months. All these developments should provide comfort to the RBI. “We expect the RBI will pause the rate hiking cycle in the February meeting and will maintain the repo rate at 6.25% for an extended period. It might also change the policy stance to Neutral,” Pathak said.

“Bond market should react positively. We expect bond yields to go down gradually though elevated bond supply will limit the downside of yields,” Pathak said.

In December 2022, the MPC hiked the Repo rate by 35 basis points to 6.25 per cent in a bid to rein in retail inflation.

The six-member committee, headed by RBI Governor Shaktikanta Das, also slashed the GDP forecast for fiscal 2023 to 6.8 per cent from an estimate of 7 per cent earlier as risks continue to emanate from protracted geopolitical tensions, global slowdown and tightening of global financial conditions.

In a majority 4:2 decision, the MPC also retained the stance on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth. Varma and Ashima Goyal voted against this proposal.

The RBI has increased the repo rate by a cumulative 225 basis points since May this year. The MPC hiked the repo rate by 40 bps in May and then by 50 bps in each of the three successive meetings. A basis point is one hundredth of one percentage point.

The markets will look forward to the RBI policy due next week for indications on likely moderation in the stance, and also with respect to the policy in relation to liquidity management. “While some amount of swings on either side are expected in the coming weeks, the markets would ultimately settle at levels dictated by the fundamentals,” said Joseph Thomas, Head of Research, Emkay Wealth Management.