India’s real rates turn positive as inflation eases, peak rate in sight

India’s real interest rate has turned positive after headline retail inflation eased below 6per cent for the first time this year, analysts said, suggesting that the peak policy rate is now close.

The RBI has hiked repo rate by 225 basis points since May, taking the terminal rate to 6.25per cent, to curb inflationary pressures. Inflation had stayed above the central bank’s repo rate for this year, implying a negative real rate, reports Reuters.

“India returned to a positive real policy rate in Nov, 2022, and this month’s 35bp (basis point) rate hike to 6.25per cent has moved the real (inflation-adjusted) repo rate even more emphatically into positive territory,” Prasenjit K. Basu, chief economist at ICICI Securities wrote in a note.

We retain our view that the Dec, 2022 rate hike was the last one for FY23 (fiscal year 2023), and the next policy action by the Reserve Bank of India (RBI) will entail a rate cut of 25bp,”

India’s retail inflation was at 5.88per cent in November, as against 6.77per cent in the previous month, surprising analysts who had predicted the reading at 6.40per cent. Inflation had stayed above the central bank’s target for 10 straight months to October.

While the central bank does not target real rates, most analysts expect it to try keeping the inflation-adjusted rate at close to 1per cent to support growth.

This would mean that the central bank will be ready to pause rate hikes as inflation is seen easing towards 5per cent in the first quarter of 2022/23, implying a real rate of above 1per cent

While the economic research division of State Bank of India believes that the chances of a rate hike are minimal in February, Nomura lowered the probability to 60per cent from 70per cent previously, reiterating that it remains a close call.

Deutsche Bank also expects the central bank to pause at its next meet and has raised the prospects of the central bank cutting rates from December.

The bank lowered its inflation forecast for the financial year by 40 bps to 6.5per cent soon after the November inflation data was released, saying the rate hike cycle has ended.

The RBI will pause any policy action between now and September, when it will cut the repo rate, ICICI Securities’ Basu said. “Amid a global tightening of monetary policy, the RBI would be wary of easing sooner.”