RBI Governor Shaktikanta Das-headed Monetary Policy Committee (MPC) started its three-day meeting on Monday amid expectations of a smaller 25 basis points rate increase or a pause on the rate hiking spree that started in May last year to check inflation.
The decision of the six-member rate setting panel will be announced by the Governor on Wednesday.
With retail inflation showing signs of moderation and remaining below the Reserve Bank of India's 6 per cent upper tolerance level, and projected slowdown in GDP growth in the next fiscal starting April, experts are of the opinion that the central bank may only opt for a 25 basis points hike in the key interest rate.
Another opinion is that the RBI may press the pause button on rate hike on Wednesday itself.
"We expect the RBI to pause in February policy," State Bank of India's Economic Research Department said in a report titled 'Prelude to MPC Meeting on Feb 6-8, 2023'.
In the current rate cycle, it said that rate actions, both hikes and cuts, have been largely synchronised with actions of the monetary authorities in the developed nations.
The stance, the SBI report said could continue to be withdrawal of accommodation, even as liquidity is close to neutral.
"Even though the RBI could pause as it allows past rate actions to work with long and variable lags, the RBI could still guide the markets with a rate action in future that will be purely data dependent," it said.
According to the report, 6.25 per cent repo rate could be the terminal rate for now.
In its December monetary policy review, the central bank raised the key benchmark interest rate (repo) by 35 basis points (bps) after delivering three back-to-back increases of 50 bps.
Since May last year, the RBI has increased the short-term lending rate by 225 basis points to contain inflation, mostly driven by external factors, especially global supply chain disruption following the Russia-Ukraine war outbreak.
Madan Sabnavis, Chief Economist at Bank of Baroda, said the credit policy will be announced against the background of both the Budget that was presented as well as the Economic Survey that served as the prelude to it. The Budget has maintained a virtually unchanged borrowing programme while the Survey has pointed to the persistence of higher interest rates in the coming year.
While inflation has been trending downwards, there has been a tendency for core inflation to remain sticky. Inflation has come down mainly due to lower food inflation which can be volatile. Also, the decision taken this time cannot be reversed soon, he said.
"Under these conditions, the RBI will pitch for another 25 bps hike in the repo rate which will be the last in this cycle, and then pause. The stance however may change from the withdrawal of accommodation to neutral as liquidity is no longer in a large surplus. In fact, based on developments that take place, there may be need to infuse liquidity during the course of the year," Mr. Sabnavis opined.
The RBI has been tasked to ensure that retail inflation remains at 4 per cent with a margin of 2 per cent. However, it failed to keep the inflation rate below six per cent for three consecutive quarters beginning January 2022.
However, the retail inflation based on the Consumer Price Index (CPI) has shown signs of moderation in November and December as it fell below the RBI's upper tolerance level of 6 per cent.
The MPC consists of three RBI officials and three external members appointed by the central government.
The external members are Shashanka Bhide (Honorary Senior Advisor, National Council of Applied Economic Research, Delhi); Ashima Goyal (Emeritus Professor, Indira Gandhi Institute of Development Research, Mumbai); and Jayanth R Varma (Professor, Indian Institute of Management, Ahmedabad).
Apart from the Governor, the RBI officials on the panel are Rajiv Ranjan (Executive Director) and Michael Debabrata Patra (Deputy Governor).