RBI which is an inflation trajectory central bank is all set to announce the first bi-monthly monetary policy of FY24 on Thursday. In line with global central banks, the RBI started the rate hike cycle from May last year to tackle extremely high inflation. However, in Western economies, especially in the US and Europe, the banking system is the first to feel the shock of rising interest rates.
Banks in the West are grappling with a lack of liquidity, as a result of which two major US banks also failed and resorted to acquisitions and mergers. concerns have been raised about rate hike cycle There is a reason for the turmoil in the banks here.
Therefore, this April policy, reserve Bank of India It is expected to be split between containing inflation and ensuring no extraordinary shocks to Indian financial systems.
Rohin Agarwal, vice president, Avenor Capital, said most MPC members in the February meeting were concerned about core inflation.
Since then, Agarwal said, domestic CPI inflation has remained above 6% for the past two months. Additionally, upside risks to food inflation remain due to disruptions due to unseasonal rains and El Nino.
On the other hand, Agarwal also throws some light on the banking crisis in the West.
“The banking crisis and slowing growth prospects in the US and Europe may also be considered by some members of the MPC to take a rate hike stance. There are growing concerns that rapid rate hikes by central banks could be a major factor,” he said. driver for recent failures at small banks in the US and EU.”
Keeping the above in mind, Agarwal believes that the RBI will have to balance its commitment to controlling inflation while ensuring that India’s financial system is not exposed to extraordinary shocks.
“Expectations around the Fed revisiting its accommodative stance on inflation will also be a consideration for the RBI. Another 25-bps rate change along with a neutral shift looks like the most likely outcome. Will also look into RBI’s position on the situation,” he added.
The VP of Avenor Capital believes that the liquidity crunch of the banking system is likely to increase during the April-June period. In the absence of liquidity support from RBI, short term rates may move up meaningfully.
Since May last year, the RBI has hiked the repo rate six times in a row – taking the total hike to 250 bps. The repo rate has shifted to a four-year high of 6.50% from 4%.
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