After Fed hike, experts can't form consensus on expected MPC response

In September review, panel talked about aggressive monetary policy actions and stances across the world

The monetary policy committee (MPC) has to take cognisance of the US Federal Reserve's fourth straight rate hike of 75 basis points in its December policy review, say some experts. Others believe that the RBI panel may go slow in its December policy onwards, despite the Fed decision.

"(MPC) won't go slow but we have to increase the rate for sure. In the last policy, RBI spoke of Fed moves being shocked. (It) has to therefore respond," said Madan Sabnavis, Bank of Baroda’ chief economist.

In its September review, the MPC had talked about aggressive monetary policy actions and stances across the world.

As financial conditions tighten, global financial markets are experiencing volatility, with sporadic sell-offs in equity and bond markets, and the US dollar strengthening to a 20-year high, it had said.

The MPC raised the repo rate by 50 basis points to 5.90 per cent in the September review.

Sakshi Gupta, principal economist at HDFC Bank Treasury, said the MPC is expected to raise the repo rate to at least 6.5 per cent or higher as providing a currency defence becomes prominent on the RBI's agenda.

On the liquidity front, conditions are likely to remain tight (with brief periods of liquidity slipping into deficit) and any injection of durable liquidity (beyond any measures under the LAF window including longer term repo operations) that is viewed as "accommodative" is likely to be difficult to deliver and to justify by the RBI, she said.

That said, there could be some natural support for liquidity conditions as government spending picks up during the second half of the year, she pointed out.

"We are expecting a step down in the next MPC review in December to a rate hike of 25-35 bps," said ICRA chief economist Aditi Nayar.

MPC had raised the policy rate by 50 bps each in its last three policy reviews after hiking it by 40 bps in an off-cycle move in May.

MPC's move this year

May: Repo hike by 40 bps to 4.40%

June: Repo hike by 50 bps 4.90%

August: Repo hike by 50 bps 5.40%

September: Repo hike by 50 bps 5.90%