RBI should pause rate hikes: SBI research

The Reserve Bank of India would do well to pause monetary tightening and assess the impact of the 2.5-percentage-point interest rate hike that has been "correctly frontloaded", SBI Research said.

In its latest Ecowrap released on Tuesday, SBI Research also raised issues with Consumer Price Index (CPI) data, saying the increase in "cereals CPI is a statistical error" and that the National Statistical Office's (NSO) "methodology is faulty in calculating inflation regarding milk and milk products".

Retail inflation eased slightly in February to 6.44%, according to government data, but remained above RBI's target rate band of 2-6%.


ET has reported that economists were expecting a quarter-percentage-point rate increase in the April 3-6 Monetary Policy Committee meeting. In the current round of monetary tightening, the central bank has raised the policy repo rate from 4% in May last year to 6.5% now.

Citing reasons for a pause in monetary tightening, SBI Research said demand for housing loans by people at the lower end of the strata has been noticeably hit.

"For the Indian context, we believe the bias of the markets siding with prefabricated rate rise numbers need to be jinxed by taking much smaller hikes of say, 10/15 bps (basis points), if at all, that should augur well for the markets," the Ecowrap said.

In an interview with ET on Tuesday, Confederation of Indian Industry chairman Sanjiv Bajaj also argued for a pause on rate hikes to spur private investment.

Statistical issues

According to SBI researchers, inflation calculations have problems. "We believe much of the data collated for inflation calculation has innate structural issues, distorting the figures by over-reliance on select non-essential parts or not factoring the changing contours of manufacturing/services," they noted.

The report said the gap in sub-indices and the headline index for cereals persisted, whereas the methodology used by the NSO for milk was faulty. "A large quantity of milk and milk products is used by the commercial establishments for making sweets, tea, coffee, etc., which is included in the CSO estimates of private consumption of milk but is excluded from the NSS (National Sample Survey) estimates," the report said.