RBI may raise repo rate by 35-50 bps

The monetary policy committee (MPC) of the Reserve Bank of India (RBI) could hike rates for the third time by 35 basis points to 50 basis points to contain elevated inflation in its upcoming bi-monthly monetary policy. The RBI’S rate-setting panel MPC will meet on August 3 for three days to deliberate on the economic situation and announce the outcome on Friday. Upasna Bhardwaj, chief economist at Kotak Mahindra Bank, said, “We expect the RBI to hike the repo rate by 50 bps in the upcoming policy.

While some of the early signs of inflation moderation is visible, we believe that the external sector risks remain abound and to offset, at the margin, the increasing pressure on INR, RBI should frontload the rate hikes even as the overall terminal rate may not eventually be very high. We continue to expect 85 basis points hike in repo rate to 5.75 per cent by end 2022.”

While aggressive rate hike by the Fed are feeding expectations that the RBI may also front load its rate hikes, a section of the economists expect the RBI to go slow as they believe that inflationary pressures have shown signs of stabilisation. The US Federal Reserve has raised rates by 225 basis points in calendar year 2022 while the RBI has raised repo rate by 90 bps —40 bps in May policy and 50 bps in June. The existing repo rate of 4.9 per cent is still below the pre-covid level of 5.15 per cent.

The central bank has already announced the intention to gradually withdraw its accommodative monetary policy stance. The government has tasked the Reserve Bank with the job to ensure consumer price index-based inflation remains at 4 per cent with a margin of two per cent on either side. Retail inflation in India surged to 7.3 per cent in Q1FY23 and is likely to remain elevated in Q2FY23, led by base effect.

Aditi Gupta, economist at Bank of Baroda, said, “We believe RBI will hike rates by 25 bps which is contrary to market expectations of 50 bps. The reason is that inflation though high is well anchored within RBI’S forecasts and there are no fresh shocks expected on this front.

“Therefore, a more calibrated 25 bps in next three policies will be in order.

“Global commodity prices including oil, have moderated from their peaks. Further, after depreciating sharply in June and July 2022, the INR is showing signs of stabilisation which also bodes well for the inflation outlook. Overall, in the absence of any fresh shocks, India’s inflation trajectory is likely to evolve in line with RBI’S projections.”

At an event in July, RBI governor Shaktikanta Das said that any RBI decision pertaining to liquidity as well as policy rate takes into account the kind of impact it shall have on growth as well as revival of economic activity.

Citigroup Inc economists expect a 35 basis-point increase in borrowing costs in the August policy, a move also predicted by Barclays Plc on the back of prices trending lower. “Falling commodity prices and lower than expected June quarter inflation could make the MPC refrain from a 50 basis point rate hike,” Citi economists Samiran Chakraborty and Baqar M Zaidi said in their report.