Could RBI change its stance after delivering a 25-bps hike on April 6? What economists say

The Reserve Bank of India’s (RBI) monetary policy committee (MPC) is expected to change its stance after a likely hike in the key interest rate by 25 basis points (bps) on April 6, as per several economists.

The Reserve Bank of India's MPC has begun its meeting on April 3, 2023, and shall continue to the same on April 5, eventually announcing its decision on April 6. The central bank is to consider various domestic and global factors before coming out with the first bi-monthly policy for fiscal 2023-24.

Madan Sabnavis, Chief Economist, Bank of Baroda said there will be a 25 bps increase in repo rate and a change in stance – to neutral, while the rate hike decision won’t be unanimous as last time and likely a pause after raising the key interest rate in April policy, according to IANS report.

Similarly, Madhavi Arora, Lead Economist, Emkay Global Financial Services also believes that the committee may change its policy stance to ‘neutral’, with non-committal forward guidance, the report also added.

According to Arora, the ‘neutral’ stance will give the MPC flexibility to be non-committal on forward guidance, yet subtly give direction on a ‘pause’.

The central bank in the last policy meeting had raised the repo rate by 25 bps to 6.5 per cent with a ‘withdrawal of accommodation’ stance on February 8, 2023.

“In our view, a ‘hawkish pause’ is less purposeful in sending clearer forward signaling, while a `hawkish hike` makes even less sense from the policy perspective, amid limited macro levers and expected growth slowdown ahead,” Arora said.

As per Pankaj Pathak, Fund Manager- Fixed Income, Quantum AMC, unseasonal rain, early forecasts of El-Nino, rising prices of milk and sugarcane, and others are negative for the inflation outlook.

On the other hand, the banking crisis in the US and Europe and the slowing growth outlook might also be considered by some members. Another 25 bps rate hike with a stance change to neutral looks like the most likely outcome, Pathak said.

A 25-bps rate hike is broadly in price while retention or change of stance will move the bond market. Retention of the current policy stance as ‘withdrawal of accommodation’ will be perceived as an indication of further rate hikes and thus will be negative for the bond market.

The market will also look for the RBI’s position on liquidity conditions. The banking system liquidity deficit is likely to increase during the April-June period. In absence of liquidity support from the RBI, the short-term rate can move higher meaningfully, Pathak said.