The Reserve Bank of India (RBI) is widely expected to moderate the pace of rate hike further to 25 basis points and indicate a pause in the future on Wednesday when it announces the decision of the monetary policy committee (MPC).

This optimism that the central bank will settle for a smaller increase in the policy repo rate arises on account of inflation slowing down from October. It came below the upper tolerance limit of 6 per cent in November at 5.88 per cent and declined to 5.72 per cent in December.

The declining trend is expected to give the rate-setting panel some comfort even as it works towards attaining the medium-term target of 4 per cent inflation.

The three-day meeting of the MPC will begin on Monday.

Apart from softening inflation, the lower-than-expected borrowing from the government for 2023-24 and fiscal prudence shown in the budget are expected to be another factor that could gravitate the MPC towards a lower increase in the repo rate.

Since May last year, the RBI has increased this shortterm lending rate by 225 basis points to contain prices. At its last meeting, it raised the benchmark interest rate by 35 basis points to 6.25 per cent after delivering three consecutive increases of 50 basis points.

However, some experts have warned that aggressive interest rate hikes may take their toll on the economy. Similar concerns have also been seen at the global level and this was one of the reasons that recently saw the US Federal Reserve opting for a quarter percentage point increase in the benchmark rate.

According to a Kotak Institutional Equities report, the global inflation environment is gradually turning benign even though inflation is still well above every central bank’s target. It pointed out that inflation will likely moderate further in the next few months, and this will lead to the end of the rate hike cycle by the first half of 2023 and possible rate cuts in late-2023 or early 2024.

“We expect the RBI MPC to hike the policy rate by 25 bps to 6.5 per cent, followed by a prolonged wait-and-watch approach, as it assesses the lagged impact of monetary tightening on growth and inflation,” it said.

It, however, cautioned that given the large global uncertainties, the levers of central banks for supporting growth through monetary easing remain limited, thereby risking higher rates for an extended period.

Observers do not rule out the possibility of at least two members of the panel — Jayanth Varma and Ashima Goyal — voting against another hike if their views in the previous two meetings are considered.

At the last meeting, while Varma had argued for a pause, Goyal voted against the resolution to remain focussed on the withdrawal of liquidity as she was of the view that the stance should be changed to neutral.

MPC MEET

■ Inflation below 6% threshold in October and November

■ Lower than expected government borrowing for next fiscal may temper rate hike

■ Sustained rate hikes may impact growth

■ MPC meet starts Monday