The Reserve Bank of India is likely to hike rates in smaller magnitude in its December policy starting today attuned to other emerging market central banks, said SBI Research in its latest Ecowrap report, adding that it a 35 basis points repo rate hike looks "imminent" and is the "new normal".
The SBI Research, in the report, said it believes 6.25 per cent could be the terminal rate in this monetary policy tightening cycle.
The RBI's three-day monetary policy committee meeting has commenced today. Financial markets will be keenly watching the committee's rate hike stance if any, as inflation is still above the 6 per cent target band.
"The good thing is that with capital inflows picking up a rapid pace in November, liquidity could get an unlikely buffer of rupee injection in lieu of $ purchases / building up reserves by RBI," the report said.
The central bank had already hiked the key policy rate by 190 basis points since May to 5.9 per cent to cool off domestic retail inflation that has stayed above the RBI's upper tolerance limit for over three quarters now. In October, retail inflation was 6.77 per cent as against 7.41 per cent the previous month.
Under the flexible inflation targeting framework introduced in 2016, the RBI is deemed to have failed in managing price rises if the CPI-based inflation is outside the 2-6 per cent range for three quarters in a row.
An out-of-turn meeting of the Monetary Policy Committee (MPC) of the Reserve Bank of India was held in early November to discuss and draft the report to be sent to the central government for having failed in maintaining the inflation mandate.
The meeting was called under Section 45ZN of the Reserve Bank of India (RBI) Act 1934, which pertains to steps to be taken if the central bank fails to meet its inflation-targeting mandate. Details about the special meeting are not officially in the public domain.
The SBI Research said inflation will be on a downward trajectory post-December 2022.
"The fear of the impact of unseasonal rains on CPI inflation (particularly on food CPI) is likely to be unfounded. While India had received a staggering 54 per cent above normal rains in October 2022, during Oct-Nov 2022 India's excess rainfall was only 23 per cent above normal... Farmers have become smarter and more tuned to ground realities...For example, crops of larger duration are being planted to take care of unseasonal rains," it explained in the report.
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