RBI Could Raise Repo Rate By 35 Bps In December 2022, Says SBI Report

The Reserve Bank of India (RBI) on September 30, raised the repo rate by another 50 basis points (bps) to bring it to 5.90 per cent.

If you are worried about your loans getting costly, then it would do well if you brace for more, as the RBI could raise the repo rate again in December, according to the State Bank of India.

“We believe that a 35 bps rate hike in December looks imminent, but beyond December it would be a touch and go. Additionally, the announcement of new projects declined to Rs. 4.35 lakh crore in Q1FY23 as compared to Rs. 5.75 lakh crore in Q4 FY22. It seems even though the intended capex announcements slowed down in Q1FY23, the working capital utilisation is still contributing to the double-digit credit growth. We need to look at this trend for the perceived growth inflation rate trade off,” the SBI said in its Ecowrap report titled, RBI Rate Hike Cycle Could Extend Till Dec: A Higher Terminal Rate Coupled With A Lower GDP Growth In FY 24 To Provide Buffer For A Rate Reversal Cycle?

The repo rate is the rate at which the RBI lends money to all commercial banks. An increase in repo rate translates into a hike in the lending as well as deposit rates. One bps equals 0.01 percentage point.

The SBI said that the RBI’s Monetary Policy Committee, while deciding on the repo rate hike, seemed “focused on withdrawal of accommodation to ensure that inflation remained within the target going forward, while supporting growth.”

A lot of global factors are still at play, because of which the pressure on inflation remains, the report said.

It further said that while the RBI retained the consumer price index (CPI) inflation projection at 6.7 per cent for FY23, it downgraded the real GDP growth projections for FY23 to 7.0 per cent from 7.2 per cent. For FY24, CPI is likely to remain at 6.5, above the 6 per cent for first three quarters of FY23.

According to the report, the RBI retained CPI inflation projection for FY23 despite the uncertainty surrounding the course of geopolitical conditions.

“There is some easing of input cost and output price pressures across manufacturing, services and infrastructure firms, however, the pass-through of input costs to prices remains incomplete. The outlook for crude oil prices is highly uncertain and tethered to geopolitical developments. Elevated imported inflation pressures remain an upside risk for the future trajectory of inflation, amplified by the continuing appreciation of the US dollar. Elevated imported inflation pressures remain an upside risk for the future trajectory of inflation, amplified by the continuing appreciation of the US dollar,” SBI said in the report.

It said the CPI inflation projections for Q2 is 7.1 per cent; Q3 is 6.5 per cent; Q4 is 5.8 per cent and Q1 FY24 is 5.0 per cent.

According to the report, the RBI has also downgraded the real GDP growth projections for FY23 to 7.0 per cent from 7.2 per cent due to geopolitical tensions, tightening global financial conditions and the slowing external demand.

That said, the rural demand is catching up, and urban demand expected to strengthen further.

“Consumer outlook remains stable and firms in manufacturing, services and infrastructure sectors are optimistic about demand conditions and sales prospects. RBI’s GDP growth projections for Q2 is 6.3 per cent; Q3 is 4.6 per cent; and Q4 is 4.6 per cent,” the report added.

The RBI further said the difference between the mandi price and the minimum support price (MSP) for most crops have declined in the past five months.

“This indicates that mandi prices are actually moderating (including paddy) which will have a favourable impact on cereals inflation (which is one of the drivers of current high CPI inflation) in coming months,” the report said.