The Reserve Bank of India RBI is expected to increase by almost 60 basis points more than that, taking it close to 6 per cent before holding off on further policy tightening in the current cycle, according to economists.
The terminal — or the rate at which the central bank stops tightening policy further — is seen at 5.98 per cent, according to the median of the inputs provided by 10 institutions. State Bank of India, HDFC Bank, Barclays, Standard Chartered Bank, YES Bank, RBL Bank, ICICI Securities Primary Dealership, India Ratings and Research, Quant Eco Research and Emkay Global Financial Services are the institutions of State Bank of India.
The MPC of the RBI went up by 50 basis points to 5.40 per cent on Friday. The RBI has reversed the cuts after the Pandemic struck India in March 2020, after the repo rate has been raised by 140 basis points since May.
The repo rate is at its highest level since August 2019 and is currently at its current level.
The central bank has retained its inflation forecast of 6.7 per cent for the current financial year despite its own observation about it having peaked, economists are unanimous that further tightening lies ahead.
There is still a lot of uncertainty surrounding inflation. It will remain above 6 per cent, which is their upper tolerance band for the foreseeable future. The principal economist, Sakshi Gupta, said that HDFC Bank's principal economist was expecting them to continue frontloading.
The consumer price index CPI inflation rate has remained above the upper limit of the RBI's mandated 2 -- 6 per cent range for six consecutive months, up to June, when it was 7.01 per cent. The RBI's medium-term target for CPI inflation is 4 per cent.
It is almost certain that the MPC will fail to meet its mandate by ensuring that average inflation does not exceed the upper threshold for three successive quarters, despite the fact that it predicted CPI inflation at 7.1 per cent in the current quarter, 6.4 per cent in October-December and 5.8 per cent in January-March. If that happens, the RBI has to give an explanation to the government. The MPC said that CPI inflation was 5 per cent in the first quarter of 2023 -- 24. The RBI governor said that the inflation projection of 6.7 per cent for FY 23 did not take into account the impact of policy actions taken by SBI Group Chief Economic Advisor Soumya Kanti Ghosh.
According to Ghosh, it is possible that Friday's rate hike will affect inflation over the long term. According to him, the RBI does not want to put a lower inflation forecast at this time, as it wants to stay ahead of the curve in an uncertain global environment. Some economists are optimistic that if the recent correction in global commodity prices is to sustain, the RBI will have room to slow down rate hikes.
The terminal repo rate expectation has gone from 5.75 per cent to 5.90 per cent, but we are categorically saying that there may be a possibility that after the October meeting, according to Barclays Chief India Economist Rahul Bajoria.