The State Bank of India SBI stated in a special report, Prelude to MPC Meeting on April 3 -- 6, 2023, that it expects the central bank to pause its repo rate in April policy. The Reserve Bank of India RBI had increased by 25 basis points to 6.5 per cent at the February policy meeting. The RBI has raised interest rates by 250 basis points since May 2022 to February 2023.
SBI, in its report, stated that bank borrowings from the recently announced Fed Bank Term Funding Programme window show that fears of a greater bank contagion are receding even as deposits of small banks continue to decline. Smaller banks are borrowing from Fed to overcome any deposit run, which is why global conditions are still evolving and fluid.
SBI said that it could be the terminal rate for the terminal rate because we believe at 6.50 per cent.
It was expected that the stance would continue to be to withdraw of accommodation even though liquidity is in deficit mode.
The RBI has reason to pause in April. There are concerns of a material slowdown in affordable housing loan market and financial stability concerns taking centre stage. While concerns on sticky core inflation are justified, it is almost certainly not possible that core inflation could decline to 5.5 per cent and below as post-pandemic shifts in expenditure on health and education and the sticky component of transport inflation with fuel prices staying at elevated levels will make it hard for inflation to fall to 5.5 per cent over the last decade. It said that RBI may have to go for more rounds of rate hikes because of this logic.
SBI expects March inflation to be around 5.5 -- 5.6 per cent and April inflation to be around 4.7 -- 4.8 per cent.
The RBI will have a delicate balance between looking forward to the June meeting with clear signs of inflation trending downwards or looking backwards at the Jan and Feb prints in April policy. It said that it will be a delicate decision.
The report stated that the Fed's rate hikes could be smaller in magnitude with one last May policy of 25 bps. It said the challenge is to decouple from the Fed. It said that a dovish Fed means a weak dollar and thus lowers the depreciation risk for the Indian rupee in the short to medium term.