Can India exit from ‘coordinated’ rate hikes? RBI’s April policy to decide: SBI

Amid the Reserve Bank's decision to hike the repo rate by 25 bps to 6.5%, economists at SBI Research say the exit from the current policy increases should be different across countries, depending on the balance of risk growth and price stability.

In light of the current hike in key lending rates, the April monetary policy of the RBI assumes special importance on whether India can signal an exit from "coordinated monetary policy increases", the report says. “Otherwise, it could become a self-fulfilling prophecy of central banks of emerging markets doing a continuous catch-up with the Fed,” writes SBI Research chief economist Soumya Kanti Ghosh in the latest note.

Notably, between April 2022 till February 2023, with coordinated monetary policy actions, the spread between the Fed funds rate and the RBI's repo rate of cumulative increases has now declined to 192 basis points, which has been constant since December 2022. "With Fed likely to go for further rate hikes in March and beyond, the spread would compress, provided there are no further rate hike of RBI," the report adds.

It says the synchronised rate actions have resulted in "increased market volatility" from pre-pandemic levels, with the rate increases from April 2022, though such volatility is lower than that was observed during pandemic levels.

In its first MPC meet after Budget 2023, the RBI on Wednesday announced the repo rate hike by 25 basis points to 6.50%, while deciding to remain focused on the withdrawal of "accommodation" to tame inflation and support growth. This is the sixth time in a row that the interest rate has been hiked by RBI since May’22, taking the total quantum of a hike to 250 bps.

In its policy announcement, the RBI downgraded its retail inflation forecast by 20 bps to 6.50% in FY24 on better prospects of the rabi crop, especially wheat and oilseeds. However, the global commodity price outlook, including crude oil, is uncertain. Against this backdrop, the RBI said the retail inflation is projected at 5.3% for FY24, with Q1 at 5.0%, Q2 & Q3 at 5.4%, and Q4 at 5.6%.

On GDP, the RBI said the real GDP growth for FY24 is projected at 6.4% against 6.8% growth in FY23, with Q1 at 7.8%, Q2 at 6.2%, Q3 at 6.0% and Q4 at 5.8%. The reasons for better-than-expected growth in FY24 are attributed to factors like stronger prospects for agricultural and allied activities, rebound in contact-intensive sectors and discretionary spending, strong credit growth, resilient financial markets, and the government’s continued thrust on capital spending and infrastructure.

On unleashing a bouquet of measures to attend to the microstructure of markets by the RBI, the SBI report says the proposed development of the introduction of securities lending and borrowing in government securities will allow G-sec holders to deploy idle G-sec to generate higher returns. On the proposal to expand the scope of TReDs, the SBI economists think these will improve the cash flows of the MSMEs and broaden the base as currently there are only 45,000 sellers registered on TReDS.

The SBI report says the decision to allow UPI access to inbound travellers for merchant payments will enrich the experience of the diaspora and provide a fillip to the government's endeavours on digitisation. Notably, the RBI recently also extended the UPI facility to NRIs, who hold international mobile numbers linked to their NRE/NRO accounts.