The Reserve Bank may opt for a final 25 basis point increase in the current rate hike cycle next week, and a reduction is only expected by the end of the third quarter of FY24, according to economists at Axis Bank.

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RBI officials reportedly met with economists on Tuesday, who recommended a 25 basis point hike in key rates. Since May 2022, the RBI has raised rates by 250 basis points to combat stubbornly high core inflation that remained above the upper tolerance limit of 6 percent.

However, borrowers have been negatively impacted, with some concerned about loan tenors extending beyond their working lives due to the hikes.

Chief Economist at Axis Bank, Saugata Bhattacharya, stated that he is leaning towards a further and final 0.25 percentage point hike in rates. He believes the hike will help tame stubbornly high core inflation.

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Bhattacharya also noted a slowdown in growth, visible in anecdotal evidence, which he believes should prompt the Monetary Policy Committee to cut rates by the end of the third quarter of FY24.

Bhattacharya mentioned that it is too early to change the "withdrawal of accommodation" stance of the RBI. However, he anticipates that some tweaks can be expected in the way it is communicated at the next review on April 6. The RBI will shift the stance to "neutral" in the June review, according to Bhattacharya.

He further highlighted that the economy's resilience in maintaining the growth momentum is remarkable, but aggregate demand is bound to get impacted due to the rate hikes and other factors.

Bhattacharya identified evidence of a slowdown in growth, such as working capital cycles getting elongated, non-bank lenders being unable to pass on rate hikes to their borrowers, low-cost automobile sales getting impacted due to higher compliance costs, and low and mid-level housing projects witnessing sluggish sales and enquiries.

According to him, the increased investments by multinationals setting up shops in India and creating relatively higher-paying jobs are helping the overall demand situation at present.

He believes that by the end of the third quarter of FY24, when growth slowdown becomes more evident and once the inflation cools down to a 5-5.50 percent range to exhibit a clear trend, the RBI will opt for a rate cut of 25 basis points.

This will result in the FY24 exit in the key repo rate at 6.50 percent, the same level as at the start of the fiscal.

Bhattacharya acknowledged the uncertainties in the overall economic climate globally, stating that "never before in economic history have we seen such kind of a phase."

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Nevertheless, he observed that all the major fast-paced economic indicators in the US and Europe are turning better.

Additionally, according to a Reuters poll of economists, the RBI is expected to raise its main interest rate by 25 basis points on April 6 to a seven-year high of 6.75 percent.

This move is aimed at tackling inflation, which has remained above the central bank's upper tolerance limit of 6.00 percent. The majority of economists surveyed, 49 out of 62, believe that the RBI will raise rates in April and then maintain a tightening stance for the rest of the year.

If the RBI does follow through with the rate hike, it will mark a cumulative increase of 275 basis points since May 2021, which is relatively modest compared to other central banks such as the US Federal Reserve. However, economists are expecting the RBI to keep all options open to tackle near- and medium-term inflationary risks.

Respondents to the survey also predicted that inflation would average 6.7 percent in the current fiscal year, before falling to 5.2 percent in the next, remaining above the medium-term target of 4.0 percent. The Indian economy is forecast to grow 6.9 percent this fiscal year and then slow to 6.0 percent in the next, with these estimates unchanged from the February poll.

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