SBI expects the RBI to pause in April policy. As per their latest research report, data suggests that bank borrowings from the recently announced Fed Bank Term Funding Programme /BTFP & FHLB window reveal that fears of a greater bank contagion is receding, though deposits of small banks continue to decline at expense of larger banks. Smaller banks seem to be borrowing from Fed to overcome any deposit run. Thus, global conditions are still evolving and fluid. They believe at 6.50%, it could be the terminal rate for now.
At home, the stance could continue to be withdrawal of accommodation, even as liquidity is now in deficit mode. RBI can always keep the options open in June policy.
• The RBI has enough reasons to pause in April. There are concerns of a material slowdown in affordable housing loan market and financial stability concerns taking centre stage. While concerns on sticky core inflation is justified, it may be noted that average core inflation is at 5.8% over the last decade and it is almost unlikely that core inflation could decline materially to 5.5% and below as post pandemic shifts in expenditure on health and education and the sticky component of transport inflation with fuel prices staying at elevated levels will act as the constraint. By this logic, RBI may then have to go for more round of rate hikes.
• Inflation data of March and April will only be known to RBI before June MPC meeting. SBI’s expectations are that March inflation could be around 5.5% -5.6% and April inflation print will be around 4.7%-4.8%. Thus, the RBI will have a delicate balancing job of either looking forward to the June meeting with clear signs of inflation trending downwards or look backwards at the Jan and Feb prints in April policy. Thus, it will be a delicate choice.
Fed rate hikes could be smaller in magnitude, and one last in May policy of 25 bps. The challenge is now to decouple from Fed. But the good thing is that a dovish Fed means soft dollar and thus lower depreciation risk for the Indian rupee in the short to medium term
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