RBI likely to hike key lending rate by 25 bps today; could it spell a pause in increases for now?

RBI Governor Shaktikanta Das-led Monetary Policy Committee — the central bank's rate-deciding panel — will announce its first policy statement of 2023 on Wednesday, February 8. The MPC is likely to go for a hike of 25 basis points in the repo rate — the benchmark interest rate at which the RBI lends money to commercial banks — to 6.5 per cent, according to a poll of economists by Zee Business.

The current RBI policy meeting, which began on February 6, comes at a time when major central banks around the globe have the Herculean task of taming red-hot inflation without damaging growth amid fears of at least a mild recession. Investors are tracking macroeconomic data from major economies including the US and India closely for more clarity on an end to the current cycle of aggressive hikes in benchmark interest rates. 

Here are 10 key things to know before the February 8 policy statement:   

1. If a 25-bp hike materialises on February 8, as projected by the poll, the repo rate will be restored to a level last seen in February 2019.

2. According to the Zee Business poll, the expected move on February 8 is likely to be the last hike of the current cycle of monetary policy tightening. Simply put, they predict that the central bank will stop increasing the key lendings rates after February 8.

3. Economists are divided over whether the RBI will modify its inflation and GDP forecasts:

Currently, the MPC projects consumer inflation at 6.7 per cent and real GDP growth at 6.8 per cent for the year ending March 2023.  

4. Many economists believe the recent inflation readings leave room for the RBI to pause its rate hikes for now. Consumer inflation returned to sub-six per cent levels in November last year after 10 quarters. The RBI aims to keep inflation within two per cent of its target of four per cent on each side.

5. "We expect the MPC to retain the guidance towards a hawkish tilt, given that core inflation remains elevated and economic activity remains resilient. After this final rate hike, we expect the repo rate to be maintained at 6.5 per cent for a prolonged period," said Upasna Bhardwaj, Chief Economist at Kotak Mahindra Bank. 

6. The RBI tracks consumer prices in the country closely for formulating its monetary policy. In the depths of the pandemic, it had briefly prioritised growth over inflation. 

7. The central bank's rate-deciding committee is not likely to announce liquidity-boosting measures on February 8, according to the poll.

8. The RBI has hiked the repo rate by a total of 225 basis points in five instalments since May 2022. 

9. In the last policy review of 2022, it raised the repo by 35 basis points, following three back-to-back increases of 50 bps each.

10. The Fed has raised the funds range — or the key lending rate of the world's largest economy — by a cumulative 450 bps in eight tranches since March 2022. Fed Chair Jerome Powell switched to a smaller rate hike of 25 bps but ruled out any reductions until the end of the year. 

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