Daijiworld Media Network - New Delhi
New Delhi, Nov 14: The Reserve Bank of India (RBI) is likely to raise the repo rate by 25 basis points in December instead of a sharper 50-bps hike, as inflation, currency and global economic pressures show signs of easing, according to a report by SBI Research.
Revising its earlier projection, the report said the balance of probabilities had shifted towards a smaller rate adjustment. It also indicated a 50 per cent possibility of the terminal repo rate being lowered from 6 per cent to 5.75 per cent.
For the first time in the new series, Consumer Price Index (CPI) inflation crossed the 6 per cent mark, reaching 6.09 per cent in October. This was also the first time inflation breached the RBI's upper tolerance limit.
The report projected that inflation would remain above 6 per cent next month before decelerating 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.
SBI Research noted that the RBI's efforts to manage volatility in the rupee had yielded results, with the currency moving below Rs 94 against the US dollar before subsequently weakening again.
The central bank has also successfully eased liquidity pressures. The call rate, which had climbed to as high as 5.8 per cent in the last week of October, subsequently declined to below the Marginal Standing Facility (MSF) rate of 5.44 per cent.
An improvement in the external environment, supported by a revival in capital flows, is also expected to ease pressure on the rupee.
The report said a correction in the artificial intelligence (AI) investment boom could improve India's relative market valuations and support foreign institutional investor (FII) inflows. FII investments have already reached approximately $7.65 billion since November 6.
It also pointed to developments surrounding Anthropic's entry into the public equity market, reportedly expected around November 12. The company's earlier target valuation of $1.5 trillion to $2 trillion had been reduced significantly to $1.4 trillion, making it an important indicator of the sustainability of the AI boom at current levels.
Meanwhile, prospects of de-escalation in the US-Iran conflict have improved the outlook for crude oil prices.
Crude oil prices have declined 11 per cent since the US elections and are expected to moderate from historical highs, averaging around $87, the report said.
SBI Research further noted that US Treasury yields could soften following the Democrats' victory in the US mid-term elections. It expects the US 10-year Treasury yield to move towards 4.75 per cent.
For India, the 10-year government bond yield is expected to settle in the 6.75-7 per cent range, but 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.
The report also said another rate hike in February would not be advisable, particularly with the Union Budget approaching. Instead, it expects the anticipated 25-bps hike in December to be followed by a more data-dependent monetary policy approach.