The trajectory of India’s interest rate cycle appears to be shifting, with most economists now projecting a terminal repo rate of 6%. This represents a downward revision from earlier forecasts that suggested the rate might climb to 6.25%. Experts indicate that this shallower hiking cycle is contingent upon crude oil prices remaining soft and a potential de-escalation of geopolitical tensions in West Asia through 2027.
Despite the move toward a lower terminal rate, market expectations for an immediate increase remain high. Retail inflation in October reached 6.09%, crossing the Reserve Bank of India’s (RBI) upper tolerance limit of 6% for the first time in two years. The Monetary Policy Committee (MPC) is set to announce its next policy decision on December 4, following an earlier 25 basis point increase to 5.50% at their October meeting.
State Bank of India chief economic adviser Soumya Kanti Ghosh noted that the balance of probabilities has shifted toward a 25 basis point hike in December. However, in a recent report, Ghosh added that further hikes in February would be inadvisable given the proximity to the Union Budget. Barclays chief economist Aastha Gudwani stated that while inflation has likely peaked and may soften in future Consumer Price Index (CPI) readings, it will remain elevated enough to warrant measured actions by the MPC.
Indranil Pan, chief economist at Yes Bank, pointed out that while a hike in April remains a possibility, the probability has weakened due to a steadying rupee and cooling global crude oil prices. Crude oil, specifically Brent prices, saw a sharp decline in early November as markets adjusted to changing political developments in the United States. Despite these shifts, analysts warned that domestic risks, such as the potential impact of El Niño on food prices, continue to pose challenges to the inflation outlook.
Key facts
- The repo rate terminal peak is now projected at 6% rather than the previously expected 6.25%.
- October retail inflation was recorded at 6.09%, exceeding the RBI’s 6% upper limit.
- The Monetary Policy Committee will announce its next interest rate decision on December 4.
- At its October meeting, the MPC increased the policy rate by 25 basis points to 5.50%.
- The RBI is legally mandated to keep headline inflation between 2% and 6%.
Why it matters
The revised outlook for a 6% terminal rate suggests a potential easing of pressure on borrowers, as the rate-hike cycle appears less aggressive than initially feared. If the central bank maintains this shallower trajectory, it may provide stability for consumer and corporate lending markets, provided that food prices and other inflationary factors remain within manageable bounds.
Source: Economic Times
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