Summary of this article
SBI Research cuts December RBI rate hike forecast to 0.25 per cent.
Improved rupee stability and foreign inflows support smaller rate increase.
Inflation may stay above 6 per cent in November.
The State Bank of India’s Economic Research Department has lowered its forecast for the Reserve Bank of India’s (RBI) December interest rate hike to 0.25 per cent from its earlier estimate of 0.50 per cent. The revision comes amid improving external conditions, stronger foreign investment flows, and reduced pressure on the rupee.
The assessment comes even as retail inflation has crossed the RBI’s upper tolerance limit of 6 per cent, raising concerns about further price increases in the coming months. SBI Research, however, expects the central bank to opt for a smaller rate adjustment at its next monetary policy meeting.
Inflation Likely To Stay Above 6 Per Cent In November
According to SBI Research, consumer inflation could stay above 6 per cent in November before easing in the following months. Price data collected by the Department of Consumer Affairs during the first two weeks of November also point towards continued pressure on prices.
The research department has placed a 50:50 probability on the December rate hike being the final increase in the current monetary tightening cycle. It has also indicated that the terminal repo rate, or the highest rate in the cycle, could reach 5.75 per cent.
In October, the RBI increased the benchmark repo rate by 0.25 percentage points to 5.50 per cent. This was its first rate hike in nearly four years, with inflation, rupee weakness and elevated crude oil prices among the factors influencing the decision.
Rupee Stability And Foreign Investments Support Smaller Hike
SBI Research had earlier considered two options for the December Monetary Policy Committee (MPC) meeting. These included a 0.50 per cent increase or a 0.25 per cent hike followed by another 0.25 per cent adjustment through a widening of the policy corridor.
Recent changes in financial conditions have tilted the outlook towards the smaller increase. The rupee has moved below 94 against the dollar, while pressure on banking system liquidity has also eased.
The call money rate, which touched 5.80 per cent in the final week of October, has subsequently fallen below the marginal standing facility rate of 5.44 per cent. Foreign institutional investors (FIIs) have also brought around $7.65 billion into Indian markets since November 6, according to the research note.
Global Developments May Ease Inflation Pressure
The report also pointed to lower crude oil prices and improving global financial conditions. Crude prices have fallen 11 per cent since the US elections to around $87 per barrel, partly supported by expectations of reduced tensions between the US and Iran. SBI Research said it expected the US 10-year Treasury yield to move towards 4.75 per cent following the Democrats’ victory in the mid-term elections.
For India, the 10-year government bond yield is projected to settle between 6.75 per cent and 7 per cent, with expectations of a decline. The possibility of 3-4 consecutive rate hikes, which had gained attention earlier, is now considered unlikely by the research department.
