RBI is All Set to Increase Rates by 25 Bps, Is it the Last Hike?

The Reserve Bank of India (RBI) is set to announce its decision on the interest rate change tomorrow as it will conclude its 1st bi-monthly monetary policy committee (MPC) meeting for the year. 

Inflation is already moving lower with the CPI falling for the third straight month to a 12-month low of 5.72% in December 2022 which is also the second consecutive month of inflation staying below the RBI’s upper tolerance level of 6%. This would provide more room for the RBI to abate the quantum of rate hike in the upcoming MPC decision. The moderation in the last CPI data was largely on account of a decline in food & beverage inflation.

Image Description: Bifurcation of Consumer price inflation in December 2022 (%YoY)

Image Source: CSO, NSE EPR

On the other hand, WPI inflation has also fallen to a 22-month low of 5% in December last year, significantly lower than 14.3% in December 2021. The result was largely due to lower prices of manufactured goods, thanks to falling commodity prices. With this, the deviation between retail and wholesale inflation has almost nullified and the CPI marginally surpassed WPI after a gap of 20 months indicating the impact of a complete pass-through of higher input costs.

The US Fed has also started to reduce the pace of rate hikes as inflation is coming under control, going from a 75 bps hike in November 2022 to a 50 bps hike in December 2022 to a 25 bps hike in February 2023. The US inflation has also seen a noticeable downtick, falling for 6 consecutive months to 6.5% in December 2022, from the peak of 9.1% in June 2022. 

Image Description: The 2-year trend of the Interest rate cycle (the last histogram is the forecast of the upcoming rate hike)

Image Source: Investing.com 

On both the global and domestic front there is strong evidence of easing inflationary pressure. Since inflation is now under 6%, the RBI might give the rates a last push to ramp up the real rates to around 100 bps, considering inflation to average around 5.5% during 1H CY23.

The current repo rate is 6.25% after the last hike of 35 bps and the RBI is firmly expected to go for the last 25 bps hike. The Nifty 50 index might not react much to this decision as it's majorly been discounted in the market. However, a hike above or below it might create some volatility ahead of the 9th February 2023 weekly expiry.