MPC to raise rates, inflation forecast in this week’s meet
With the US not yet relenting on moderating the pace and quantum of rate hikes, and domestic inflation not showing immediate signs of abating, the monetary policy committee (MPC) of the Reserve Bank of India (RBI) is likely to deliver a policy rate hike of 25-40 basis points on June 8. Economists also expect the MPC to revise the inflation forecast higher, possibly indicating inflation remaining close to 7 per cent for most part of calendar year 2022.
The RBI will continue to focus on taking on inflation and signalling its intent to continue raising rate and normalising liquidity, while not entirely losing its focus on growth given the uneven nature of growth recovery.
Governor Shaktikanta Das-headed MPC will meet for three day beginning Monday. The outcome of the meeting will be announced by the governor on Wednesday.
Churchil Bhatt, executive vice president debt investments at Kotak Mahindra Life Insurance, said, “We may have seen the peak of inflation for now but we may not have seen the end of it yet. And failure to bring down inflation even after the central bank reaches the neutral rate has the possibility of destabilising the economy. Hence, failure to contain the inflation genie should scare the markets more than the policy maker’s fight against it. We expect the MPC to deliver a no-brainer policy rate hike of 25-40 bps (basis points) in June.”
Some economists also expect the RBI to hike the cash reserve ratio (CRR) in one of the upcoming policies but contingent on how the durable liquidity would pan out over the next few months.
Madan Sabnavis, chief economist, Bank of Baroda, said, “The sense one gets is that the RBI will revise its forecast upwards for inflation while GDP growth may not be altered much at this point of time. The increase in repo rate can be taken as almost a given but the quantum may not be more than 25-35 bps as the earlier minutes of the meeting held in May indicated that the MPC was not in favour of a large increase in repo rate at one shot. While the market is still concerned about the concept of withdrawal of accommodation in terms of liquidity, the RBI’s stance has been clear.
“This has already commenced albeit gradually through various measures taken to not provide excess liquidity (GSAP) and orderly withdrawal of the same. While a further CRR hike can be on the cards, this may not be invoked at this point.”
Last month, governor Das signalled several rate hikes in order to bring down the stubbornly high inflation within the central bank’s comfort zone and said that expectations of higher rates is a ‘no brainer’. In an interview to a news channel, Das said, “Expectation of rate hike, it’s a no-brainer. There will be some hike but how much I will not be able to tell now… to say that 5.15 (per cent) may not be very accurate.”
The retail inflation, which RBI factors in while arriving at its monetary policy, galloped for a seventh straight month at 7.79 per cent in April, mainly on account of surging commodity prices, including fuel, due to ongoing Russia-Ukraine war. The May Consumer Price Index reading could come at 7.1 per cent due to a sharp increase in tomato prices.
Similarly, the wholesale price-based inflation has remained in double digits for 13 months and touched a record high of 15.08 per cent in April. Inflation above the 6 per cent upper range for several months had prompted the central bank to raise rates in an unscheduled meeting, held between May 2 and May 4.