According to economists, the Indian central bank will deliver a 25 basis points increase in its policy rate on Wednesday, which will be the final increase in this tightening cycle.
They further said that the central bank would then hit pause to assess the impact of the rate hikes that have been delivered so far.
Tightening cycle
The economists said that inflation had already hit its peak and there were also signs of a slowdown in domestic demand.
Therefore, the Monetary Policy Committee (MPC) would deliver a final 25 basis points increase to put an end to its tightening cycle.
In December, there was a drop in annual retail inflation as opposed to November and it remained in the 2% to 6% comfort zone of the central bank for the second month in a row, amidst cooling food prices.
Analysts said that the decision would be a close one between delivering a 25 basis points increase and hitting a pause on the tightening.
They said that it might be the right time to hit pause, given that inflation in the first quarter of the year will be moderate, domestic demand has become uneven and external demand is also uncertain.
Expectations
Before the announcement of the 2023/24 budget by the government on February 1st, most economists had predicted that the RBI would increase the interest rate to 6.50%, a hike of 25 basis points.
But, there are also some that believe that the Reserve Bank of India would not make any changes in its meeting on February 8th.
After the budget, Nirmala Sitharaman, the Finance Minister, said in an interview that the inflation downtrend should pressure the RBI to maintain the interest rate.
But, she also added that it was eventually the decision of the Monetary Policy Committee (MPC). The announced budget contained one of the biggest ever increases in capital spending in India.
This has been done for creating jobs and also for reducing the fiscal deficit.
The concerns
While the borrowing numbers turned out to be lower than expected and this resulted in a positive market reaction, there are still some concerns.
Investors are worried that if there is a rise in demand for credit from private companies for capex, it would result in a fall in demand for government debt.
Therefore, investors will scrutinize the commentary of the RBI about the future pace of rate hikes, management of the borrowing program of the government as well as liquidity.
State Bank of India’s economists has said that there may not be enough demand for the record gross borrowing from market participants.
The SBI economists said that open market bond purchases may have to be considered by the central bank for balancing the demand and supply in the second half of the year.
Otherwise, they would have to consider purchasing mature bonds back in the near future and then offering long maturity bonds instead.
Barclays said that they are expecting the policy stance in India to shift to neutral, where it was seen in December 2018.