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UOB Group’s Head of Research Suan Teck Kin, CFA, reviews the latest interest rate decision by the RBI.
Key Takeaways
“The Reserve Bank of India (RBI) at its Feb 2023 Monetary Policy Committee meeting lifted the benchmark repo rate as widely expected, by 25bps to 6.50%. This followed the downshifting to 35bps hike (to 6.25%) at the Dec 2022 MPC after three consecutive rounds of 50bps move. The current repo rate is at a level last seen in Jan 2019, just before RBI entered its policy accommodative phase.”
“Inflation pressure remains RBI’s overriding concern and the main policy objective, as core inflation rate stayed above the upper band of the target inflation rate (4%+/-2%) for the second straight month in Dec 2022, despite overall inflation trending below the 6% level for the second consecutive month. RBI noted that core inflation “remains sticky” but expected inflation to moderate in 2023-24 and “to rule above” the 4% target.”
“Outlook – With RBI’s policy priority on containing inflation pressures while being mindful of the ongoing pass-through of input costs, and that the stickiness of core inflation is “a matter of concern”, the central bank’s hawkish tone signals that its job is not done yet. This is also reinforced by RBI’s comments that overall monetary conditions “remain accommodative”. Based on the above factors, the RBI is unlikely to be taking a pause anytime soon. We thus pencil in one final interest rate rise of 25bps, to 6.75%, at the next MPC meeting (3-6 Apr 2023).”
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