RBI likely to hike repo rate by 25 bps in Dec as global pressures ease

New Delhi: The Reserve Bank of India is likely to hike the repo rate by 25 basis points in December instead of a sharper 50 bps increase, a report has said.

While revising its earlier call, a report by SBI Research said inflation, rupee and global pressures show signs of easing.

There is a 50 per cent probability that the terminal repo rate could be scaled down from 6 per cent to 5.75 per cent, it added.

For the first time in the new series, CPI inflation crossed the 6 per cent mark and stood at 6.09 per cent in October, also the first time inflation has crossed the RBI's upper tolerance level.

The report’s projections indicate inflation will remain above 6 per cent next month and decelerate thereafter.

However, considering recent developments, we believe that the balance of probabilities has decisively shifted towards a 25-bps rate hike in December, rather than a larger 50-bps adjustment," the report said.

The RBI's efforts to manage rupee volatility have yielded results with the currency moving back below Rs 94/USD before moving up, it added.

The central bank has also successfully eased liquidity pressures with the call rate, which had risen to as high as 5.8 per cent in the last week of October, subsequently declining to below the MSF rate of 5.44 per cent.

Also, improvement in the external environment, supported by revival in capital flows, should help ease pressure on the rupee.

Correction in the artificial intelligence (AI) story improves India's relative valuation and will support FII inflows.

In addition, FII inflows have already reached approximately $7.65 billion since November 6.

The report noted Anthropic's entry into the public equity market, likely on November 12, with an earlier target valuation between $1.5 trillion and $2 trillion now reduced significantly to $1.4 trillion, clearly serves as a barometer for the sustenance of the AI boom at current levels.

Additionally, the prospect of de-escalation in the US-Iran conflict has improved the outlook for crude oil prices.

Post-US election, crude oil has fallen by 11 per cent. Crude oil prices are expected to moderate from historical high levels and average around $87, according to the report

It further noted that US Treasury yields are likely to soften further following the Democrats' victory in US mid-term elections.

SBI Research has expected that the US 10-year yield to move towards 4.75 per cent.

For India, the 10-year yields will likely settle in 6.75-7 per cent, but now with a clear downward bias.

"Importantly, expectations of three to four successive rate hikes, which had gained traction earlier, now appear to be an outlier. We see the terminal repo rate settling at around 6 per cent, with a downside possibility of 5.75 per cent. We assign a 50:50 probability to both these possibilities," SBI Research said.

However, it does not consider a further rate hike in February advisable, particularly given the proximity to the Union Budget. Instead, expects the December 25 bps hike to be followed by a more data-dependent policy approach.