The RBI’s monetary policy committee (MPC), which meets this week, is expected to raise policy interest rates by another 50 basis points in its fight to contain inflation, economists say. Last month, in an off-cycle meeting, RBI hiked interest rates by 40 basis points taking into account the pressure that high food and fuel prices have created in the face of the Russia Ukraine war. Now, with consumer inflation above RBI’s tolerance limit of 6 per cent for three consecutive months, RBI is expected to hike repo rate and CRR; raise inflation projections and cut growth expectations, economists said.
To contain the inflation genie, experts see the RBI to hike repo rate 25-50 basis points in the MPC meeting scheduled during June 6-8, and reiterate an accommodative stance, while focusing on withdrawal of accommodation. In terms of inflation expectations, some economists expect the central bank to raise the inflation forecast by 80 to 90 bps in this week’s meeting. According to the last RBI projections, inflation is expected to average 5.7% in FY 2023.
On an average inflation is expected to remain above 6% throughout the year, amid high crude oil and commodity prices, according to experts. Private forecasters and economists see inflation between 6 to 7.5% this year. If average inflation does not stay within the 2-6 per cent range for three consecutive quarters, it is seen as a failure of the RBI, according to the monetary policy framework agreement between the central bank and the government under the RBI Act.
Here’s what experts expect from the RBI in June MPC meeting:
‘With inflation persisting beyond 6% and growth chugging along, expect RBI to hike rates by 40 bps in June’ : BofA Securities
Since the RBI MPC hiked policy repo rate by 40 bps in an off-cycle meeting, inflationary pressures have risen further, and we now see May CPI at 7.1% yoy due to a sharp increase in tomato prices, BofA Securities. “We see CPI inflation average at 6.8% yoy in FY23. We also expect the RBI MPC to revise up their inflation forecast from 5.7% now to ~6.5% yoy for FY23. As for GDP growth estimate, we see FY23 real GDP growth at 7.4% yoy, a shade higher than RBI’s 7.2% forecast. We don’t expect the RBI MPC to make any changes to their growth estimate.”
“In this backdrop of inflation persisting beyond 6% (the upper limit of the tolerance band) and growth chugging along, we expect the RBI MPC to hike policy repo rate by 40 bps in June and 35 bps in August. We must highlight that for the sake of standardized steps, the chances of delivering a 50+25 bps hike combination is quite high too. The key thing is that RBI MPC exits ultra-accommodation by August and takes policy repo rate to the pre-pandemic level of 5.15%.”
‘Inflation appears more and more entrenched; clear signs of inflation generalisation’: Axis Bank
“Inflation is a major problem, appearing more and more entrenched and risking higher inflation expectations. All the while, inflation projections have been rising steadily across markets. Markets expect aggressive tightening from global central banks this year, but fears of recession have halted the march upwards,” Axis Bank said in a pre-MPC note. Axis expects CPI inflation to average at 6.7% in 2022
April CPI readings shot up to 7.79% from 6.95% in March, driven by broad-based increase in food, fuel and core inflation, Axis Bank said. It sees clear signs of generalisation of inflation momentum, with 68% of the core basket witnessing above 6% inflation. Average inflation is expected to remain above 6% for three successive quarters – constituting a failure to meet the inflation target as per RBI Act, Axis Bank added.
‘Back-to-back rate hike imminent; expect a 50 bps rate hike in June meeting’: SBI Research
SBI said a back-to-back rate hike is imminent in the June meeting adding that it expects a 50 basis points rate hike with an accommodative policy stance (with focus on withdrawal of accommodation). “The persistence of high inflation is forcing countervailing monetary policy action at a time when supporting the economic recovery should have been assigned priority,” it said. “During 2022 so far, more than 45 central banks across AEs and EMEs have raised policy interest rates and/or scaled back liquidity, with many central banks hiked interest rates in back-to-back policies,” it added.
‘Failure to contain inflation genie could scare markets’: Churchil Bhatt, EVP & Debt Investments, Kotak Mahindra Life Insurance Co
“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 destabilizing 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 (basis points) bps in June.”
‘RBI to hike repo rate by 40 bps, CRR by 50 bps’: Suvodeep Rakshit, Senior Economist, Kotak Institutional Equities
“We expect the RBI to hike repo rate by 40 bps in the June policy meeting. However, we should be open for a rate hike between 35-50 bps hinging on how the MPC wants to reach the pre-pandemic repo rate of 5.15% or around that mark by the end of the August policy. The RBI is likely to hike the CRR in one of the upcoming policies but will be contingent on how it sees the durable liquidity panning out over the next few months. We expect another 50 bps of CRR hike by end-FY2023. Along with the repo rate hike, the RBI will also revise its inflation estimates higher, possibly indicating inflation remaining close to 7% for most part of CY 2022.”