The Rate Hike Cycle Has Begun. Where Will It Stop?

A Return To Neutral

The terminal policy rate may be around or a tad higher than 5.5%, with the RBI now showing its intent to keep real rates neutral or above, Madhavi Arora, lead economist at Emkay, said in a note.

“In keeping with the RBI governor’s interpretation of ‘withdrawal of accommodation’, we may safely conclude that the intention is to return the repo rate to the pre-Covid level of 5.15%,” Arora said. Thus, Emkay expects the possibility of another 75 basis points of rate hikes in FY23, totaling 115 basis points, to be front-loaded over the next three meetings between June and October 2022.

Pranjul Bhandari, chief economist at HSBC, too, said the terminal repo rate in this cycle will be 5.5% by mid-2023. This will leave the repo rate somewhat higher than 5.15%, where it was on the eve of the pandemic, she said.

“Our FY24 CPI inflation forecast is 5.5%, implying that by mid-2023 India will be out of the negative real rates territory.” The RBI’s strategy could well be sharp rate hikes initially which will eventually allow the terminal repo rate to remain relatively low and supportive of medium-term growth, she said.