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MPC likely to raise repo rate significantly in upcoming meetings: S&P

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Global rating agency S&P on Tuesday said it expects “significant” increases in the policy rates by the Reserve Bank of India’s (RBI) monetary policy committee (MPC) at its upcoming meetings. The assessment comes a week ahead of the MPC’s three-day meeting.

“Largely in response to high inflation, the Reserve Bank of New Zealand has been among the most hawkish developed market central banks, having started hiking its policy rate in October 2021. Starting from a higher level, the Reserve Bank of India started lifting rates later. But we expect significant additional increases in policy rates there,” the rating agency said in its latest report.

The report, titled Asia-Pacific: Varying Core Inflation Paths Drive Monetary Policy Divergence, said that in general the region may not follow the USD Federal Reserve (US Fed) closely, since the region’s core inflation is generally lower, even in developing economies. Core inflation excludes food and fuels.

However, the case of India, along with a few other countries, is different. The US Fed is expected to hike its benchmark rates at its meeting on Wednesday.

In India and New Zealand, core inflation was around six per cent in mid-2022, as high as in the US, the S&P said. In New Zealand, the reasons for elevated core inflation were the same as in the US. With little slack in the economy and a tight labour market, the cost increases have triggered pass-through and wage increases. However, New Zealand did not suffer as much of an economic downturn because of Covid-19, it said.

India’s case is different as core inflation is traditionally relatively high in the country, S&P pointed out. “There is now in principle significant slack in the economy, as GDP (gross domestic product) is far below estimates of the pre-Covid trajectory of potential output. But, in part because of a relatively unresponsive supply side, core inflation is rising rapidly anyway,” S&P said in the report.

While overall consumer price index (CPI)-based inflation rate declined moderately from 7.04 per cent in May to 7.01 in June, core inflation rose from 5.5 per cent to 6 per cent.

The MPC has raised the repo rate by 90 basis points (bps) so far in the current financial year. It had cut the rate by 115 bps to lift the economy, marred by Covid-induced lockdowns.

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