Most economists see 50-bp repo rate hike

FY23 inflation projection may go above 6%; liquidity steps anticipated

Amajority of the participants in a poll conducted by Business Standard expects the six-member Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) to raise the policy rate, or the repo rate, by 50 bps to 4.9 per cent this week.

Six of the 10 polled expect a hike of 50 basis points (bps) while the rest said it could be 35-40 bps.

In a surprise off-cycle meeting in early May, the MPC decided to raise the interest rate for the first time in four years — by 40 bps — after the inflation situation deteriorated owing to worsening geopolitical conditions.

“We expect the MPC to increase the repo rate by at least 50 bps on June 8,” said Kaushik Das, chief economist, India and South Asia, Deutsche Bank Research.

“We don’t rule out the possibility of even a 60 bps hike if the RBI decides to round off the cumulative rate hike to 100 bps by June,” Das said, adding, the RBI was expected to revise the inflation forecast to 6.9 per cent for FY23.

Deutsche Bank is projecting retail inflation for May at 7 per cent.

The consumer price index-based inflation rate, which the central bank is mandated to keep at 4 per cent, give or take 2 per cent, grew to 7.78 per cent year-on-year in April. The rate stayed above 6 per cent in the first four months of 2022.

Economists said the RBI could hike interest rates in the August policy too, taking the repo rate to 5.5 per cent before pausing.

“We foresee the MPC hiking the repo rate by a further 40 bps in the June review and 35 bps each in the August and October reviews, followed by a pause to assess the robustness of growth,” said Aditi Nayar, chief economist, ICRA Ratings.

The MPC is expected to hike interest rates aggressively even though the economy is still not out of the disruption the pandemic has caused. This is because it has the mandate to keep the retail inflation rate at 2-6 per cent for three consecutive quarters.

“As of now, we see the terminal repo rate in the current rate hike cycle at 5.5 per cent. We believe that overtightening is not warranted under the current circumstances because inflation is being fuelled by global-supply side factors and it may needlessly sacrifice domestic growth and sentiment,” Nayar said.

All the participants in the poll expect the central bank to revise the inflation projection for FY23 to more than 6 per cent. In the April policy review, it was 5.7 per cent.

Some participants see the growth forecast for FY23 trimmed to 7 per cent from 7.2 per cent, which was projected in April. A few also expect the central bank to suck out further liquidity by increasing the banks’ cash reserve ratio (CRR). In May, the CRR was hiked by 50 bps to 4.5 per cent, which drained out ~87,000 crore from the banking system.

“Liquidity has significantly declined and thus a further CRR hike increase will be touch and go,” State Bank of India said in a report.

Net liquidity absorption by the RBI fell to ~3.64 trillion on June 2, down from ~5.27 trillion a month ago.

“(The) government’s surplus cash balances currently (stand) at ~3.1 trillion, thus the liquidity situation will depend on how much the government spends,” the SBI report said.