RBI MPC Meeting: Today's MPC meeting will begin; experts expect a 25-35 basis point rate increase.

On December 7, RBI governor Shaktikanta Das will make the bimonthly monetary policy announcement. This announcement from the monetary policy committee (MPC) in 2022 will be the last one. The repo rate has increased 190 basis points so far this year, rising from 4.4% in May to 5.9% in September.

25 basis points, perhaps 35 basis points, or a further 50 basis point increase? The conclusion of the RBI's rate rise in December 2022, which is due for tomorrow, is eagerly anticipated. Instead of a fourth 50 bps increase, the vast majority of experts favour a moderate rate increase in the policy repo rate! The lowering of CPI inflation statistics below 7% in October would be the cause. Since May of this fiscal year, the RBI has increased the repo rate by 1.9% to combat the multi-year high inflation that has caused home loan EMIs to increase significantly.

Any change in the repo rate will impact the EMIs as well because banks have linked their lending rates to repo rates on a variety of term loans. Since May, banks have been raising their benchmark lending rates, which has increased EMIs.

However, it might also cause the economy's economic activity to slow down. Therefore, the RBI must balance the rate increases.

Experts told media that the RBI will likely increase the repo rate by 35 basis points in the upcoming MPC announcement.

The following five main factors, as identified by economists, will influence RBI decision-making at this policy meeting:

1. Reduced inflation:

Although the headline inflation rate is still high, the incremental momentum is beginning to slow. Therefore, it is likely that the RBI will adopt a moderate approach to raising interest rates. The MPC may also hint at the possibility of a pause next year if the CPI inflation keeps moving down and there are no positive surprises from commodity prices.

2. No detrimental effects on growth:

According to experts, the fact that growth has not been affected by recent rate increases notwithstanding them may have an impact on the RBI's decision. "This will provide the MPC the assurance to continue raising rates so that the terminal repo rate would be close to 6.50 percent in this rate-hike cycle. "However, given that domestic inflation is likely to have picked up and the US Fed has made it clear that it will slow down the current pace of interest rate hikes, we might see the quantum of a rate hike in December policy lower than 50 basis points," said Dr. Sudarshan Bhattacharjee, principal economist at Yubi, an Indian fintech company that was formerly known as CredAvenue.

3. GDP expansion:

GDP is unchanged (2011-12) Price increase is predicted to be 9.7% in H1 2022-23 compared to 13.7 percent during the same period last year, with prices in April-September 2022-23 (H1 2022-23) estimated to be Rs. 75.02 lakh crore as opposed to Rs. 68.36 lakh crore. According to Dr. Sriharsha Reddy, Director of IMT Hyderabad, "MPC would make a judgement based on predictions of GDP growth, food production, the global slowdown, and the impact of the repo rate rise on borrowing costs and economic recovery." The second quarter's GDP growth has decreased, and it appears that the third and fourth quarters will see even slower growth. RBI's decision on GDP growth would be closely followed, according to economists.

4. Other central banks raising interest rates moderately:

According to economists, this meeting will be crucial from the perspective of forward guidance because central banks around the world have started to slow the pace of rate hikes or have made indications that the pace of rate hikes is likely to slow in the future. Given the unpredictability of the global economy, "we expect the RBI to retain its policy stance as 'withdrawal of accommodation,'" according to IDFC First Bank economist Gaura Sengupta.

5. The low rate differential between the US and India:

The most recent US NFP data show that wage pressure has increased further, with hourly wages increasing by 5.1% YoY in November compared to 4.9% in October. As a result, analysts anticipate that the Fed will keep raising policy rates as long as the labour market is out of equilibrium. "The repo rate v/s Feds Fund rate difference between India and the US is at its lowest level since November 2006. Therefore, we anticipate RBI rate increases to continue through December. However, given that supply-side factors are primarily responsible for India's inflation pressures, Sengupta predicted that the RBI will fall short of the Fed in terms of tightening policy.

Bank of Baroda economists predict that the MPC will keep increasing interest rates, but that the pace will slow to a 25–30 basis point increase this time. In March 2023, another 25/35 will be added to this to reach the ultimate rate of 6.5%.