RBI Monetary Policy: Repo Rate to Jump Back to Pre-Pandemic Levels

India's central bank will likely announce a half-point rise in its main rate Friday to show it is not slowing down in fighting inflation and defending the rupee. As of Wednesday, 13 of 27 economists see the Reserve Bank of India's six member monetary strategy committee raising the repurchase interest by 50 basis points up to 5.40%. This is the highest level since August 2019. One economist predicted a move of 40 basis points; nine forecast a move of 35 basis points. The remaining three expect a quarter-point increase, which will be enough to bring borrowing costs back to pre-pandemic levels in early 2020.

Federal Reserve officials have signaled that a pause would be inappropriate until they see evidence that inflation is easing. RBI watchers are closely watching Governor Shaktikanta Das's comments to determine if there are any indications about the pace or length of the monetary tightening cycles as he seeks a "soft landing" for economic conditions. Since May, the central bank has raised the key rate by 90 base points. This includes a half-point increase in June. The RBI's target ceiling for inflation of 6% has not been exceeded since the start of the year. However, falling commodity prices could allow the central bank to suggest that inflation pressures are decreasing. "We expect that the RBI's commentary will soften a little with an acknowledgement that inflation risks have receded," Pankaj Pathak (fixed-income fund manager at Quantum Asset Management Co. India’s central bank is focused upon bringing down inflation.

Radhika Rao, a senior economist at DBS Bank Ltd., believes that India's inflation may have reached its peak. Rao still expects the RBI's inflation projections and growth projections to remain unchanged at 6.7% & 7.2%, respectively, for this fiscal year. Inflation battles may be complicated by the lack of rain in some rice-producing regions of India.

Economists believe that the peak rate or, as it is commonly known, the terminal rate, will be reached sooner than expected, even if the central banks eases off on rate increases. Abheek Barua, HDFC Bank Ltd. economist, said that the RBI will continue to 'front-load' rate hikes at its upcoming policy. Barclays Plc sees the policy rate increasing to 5.50% in September, compared with a previous forecast of mid-2023. Rahul Bajoria, an India-based economist, said that this will indicate that rates have reached neutral territory. This is a level at which rates can control inflation without slowing economic growth. His projection for the terminal rate was kept at 5.75%.