How Many More Interest Rate Hikes Can We Expect From The Reserve Bank?

The Reserve Bank of India (RBI) has hiked the repo rate, the rate used to signal interest rates in the economy, by 2.5% in a pretty short span of time, between May 2022 and February. It may not convey much, when we look only at this data point of 2.5%. However, it is significant.

- Joydeep Sen

Going by the history of rate action, this is much faster than the earlier rate cycles. Moreover, when we look at the base i.e.repo rate prior to the current hike cycle, it was 4%. It implies that in away 63% (2.5 divided by 4) of the base has already been ticked up. This may not mean much, as the base was at an all-time low, pandemic-induced. And the repo rate is a function of inflation and other relevant variables of the day. Nonetheless, it gives a perspective that India' central bank has already covered most of the path required to be travelled, in the context of current inflation levels.

Now let us look at the future, where the current rate hike cycle is expected to terminate. Opinions will vary, but we can form a perspective. We will look at the relevant variables.

The most important variable is inflation, as the RBI's primary objective in policy rate formulation is inflation control. In popular perception, it is the latest inflation data that shapes expectations on RBI's rate action.