India’s real interest rate has turned positive after headline retail inflation fell below 6% for the first time this year, suggesting the top policy rate is now closer, analysts said.
To contain inflationary pressures, the RBI has increased the repo rate by 225 basis points since May, taking the terminal rate to 6.25%. Inflation remained above the central bank’s repo rate for much of the year, meaning a negative real rate.
“India returned to a positive real policy rate in November, 2022, and this month’s 35bp (basis point) rate hike to 6.25% moved the real (inflation-adjusted) repo rate even further into positive territory.” given,” Prasenjit K Basu, chief economist at ICICI Securities, wrote in a note.
We maintain our view that the December, 2022 rate hike was the last for FY23 (FY 2023), and the next policy action by the Reserve Bank of India (RBI) will result in a rate cut of 25bp.
India’s retail inflation stood at 5.88% in November, compared to 6.77% in the previous month, surprising analysts predicted a reading of 6.40%. Inflation remained above the central bank’s target for 10 consecutive months till October.
While the central bank does not target real rates, most analysts expect it to try to keep the inflation-adjusted rate close to 1% to support growth.
