There isn’t much surprise expected from the outcome of the June round of monetary policy committee meetings (MPC) that starts today, June 6.
The rate-setting panel will increase the key lending rate, or the repo rate, in this round of the meeting, and the markets are betting on a 40 basis point (bps) rate hike. One basis point is one hundredth of a percentage point.
The Reserve Bank of India (RBI) governor, Shaktikanta Das, had said at the time of the May 4 out-of-turn rate hike, and also in his interview on CNBC TV 18, that another rate hike is certain. The question is, how much can rates go up?
Interestingly, one of the MPC members — Jayanth Varma — had left a clear hint on this when he said a 100 bps rate hike is likely to happen very soon. Already, banks have started passing on the higher rates across loan and deposit products.
Many banks have started hiking rates in small quantums, but ultimately the entire quantum of rate hikes from the MPC is likely to get passed on to end-consumers this time. Typically, interest rate transmission on lending rates happens first before deposit rates get adjusted.
While a sharper increase in rates will hurt borrowers as they will need to pay more for their monthly loan instalments, rising rates are good news for savers as they will get higher interest on their savings.
Clearly, inflation will top the agenda in this round of MPC meetings as high prices are hurting the common man on the ground and the MPC cannot ignore these concerns for long.
The stance is bound to change. Some economists expect the MPC to change the rate stance to "neutral" in June and follow up with a rate hike in the key policy rate (repo) at which the central bank lends short-term funds to banks. Barclays said in a note. A 25 basis point rate hike in repo coupled with a change in rate stance now looks very likely.
On April 12, official data showed retail inflation jumped to a 17-month high of 6.95 percent in March from 6.07 percent in February, driven by high food prices. The Consumer Price Index (CPI) inflation print for March is well above the consensus estimate. According to a Reuters poll, economists had expected CPI inflation to rise to 6.35 percent.
The latest inflation print confirms the monetary policy committee (MPC) assessment that persistently high inflation is a bigger worry for policymakers going ahead. The MPC has a mandate to keep inflation in the 2-6 percent band, and a breach of three consecutive quarters will require the panel to explain to Parliament why it failed to keep inflation within the band.
In the last policy review, the inflation projection was raised to 5.7 percent for FY23 from 4.5 percent, a clear acknowledgement that inflation concerns cannot be ignored by the rate-setting panel in search of growth.
It is unlikely that the central bank will further hike the cash reserve ratio (CRR) again after a 50 bps hike in the last round. That’s because the surplus liquidity in the banking system has declined sharply post the last round of action, with net excess liquidity parked under the LAF window now around Rs 3 lakh crore. The central bank may not want to tighten liquidity further at this point.
A rate hike this time is unlikely to shock the markets further as the MPC has already hinted at the future rate path. Markets have factored in the rates of return to pre-pandemic levels, taking the guidance of governor Shaktikanta Das.