The Reserve Bank of India may raise repo rates by 50 basis points in the upcoming Monetary Policy Committee meeting later this week, with taming inflation in mind, which has remained above the tolerance threshold of 6% for eight months in a row. The MPC is expected to take cues from its global counterparts, including the US Federal Reserve, to raise interest rates for the fourth time in a row. The MPC will start its three-day deliberations on 28 September, Wednesday, and will announce the decision Friday (30 September). The RBI has raised the repo rate by 140 bps since May. A 50 bps increase again this week will take the policy rate to a three-year high of 5.9 per cent. RBI had raised the repo rate by 40 bps in May and 50 bps each in June and August. The present rate is 5.4 per cent.
50 bps hike likely to tame red hot inflation
“The monetary policies in emerging markets will inevitably take cues from the US Fed. The RBI’s Monetary Policy Committee will take guidance from high inflation in India and uneven data points from global economies. They may also take into account that banking system liquidity in India has gone negative compared to 2019. With retail inflation above RBI’s comfort range, there is that the RBI will increase rates by 25 basis points. However, it is very possible that the RBI might decide this is a good time to be ahead of the curve and increase rates by 50 basis points,” said Srikanth Subramanian, CEO, Kotak Cherry.
RBI may review growth projections amid looming recession threat
The sticky inflation, along with non-abating food price rise will force RBI to have a hawkish view and a 50 basis point rise in repo rate is expected in the next policy review by RBI. “The inflationary trends are expected to continue and we have the supply side constraints too, in addition to the rising prices and interest rates across the globe. The world economy is heading towards recession, which will adversely impact the growth prospects of India also and this may lead to a review of the growth projections by RBI too,” said Jyoti Prakash Gadia, Managing Director, Resurgent India.
Rupee depreciation among major concerns, No change likely in headline numbers
“The MPC will have a unique issue to debate when it meets this week for the monetary policy. The recent downhill movement of the rupee following the Fed’s announcement has made the rupee one of the more unsatisfactory currencies based on the response to the dollar strengthening in the global market. This piece will also be actively discussed in the deliberations, as when deciding on interest rates, the currency part of the story cannot be left out,” according to Madan Sabnavis, Chief Economist, Bank of Baroda.
“Inflation remains high at around 7% and is unlikely to come down any time soon. This means that a rate hike is given. The quantum is what the market would be interested in. While a hike of 25-35 bps would have signaled that the RBI is confident that the worst of inflation is over, the recent developments in the forex market could prompt a higher quantum of 50 bps to stay on track with other markets so as to retain investor interest, Sabnavis added.
According to him, the RBI’s take on both inflation and GDP growth will be important. No change is expected in the headline numbers. “GDP growth in Q1 was lower than RBI expectations, but given certain anomalies in the data there would be some revisions that will help to retain their targeted level of 7.2%. Presently with no new shock expected on the prices front the inflation forecast will remain unchanged,” he said adding that stable global commodity prices especially oil provides a lot of comfort for the central bank.
RBI likely to pause rate hike after December MPC
The US Federal Reserve raised interest rates by 75 bps for the third consecutive time taking the policy rate to 3.0-3.25% with a view to combat the 40-year high inflation. From the domestic perspective, the overall economy continues to remain resilient with high-frequency indicators displaying incremental strength. “On the other hand, the uptrend in inflation has propelled the RBI to hike rates by 140 bps in 2022 so far, taking the repo rate to the pre-pandemic level of 5.40% currently. Acuité expects one more rate hike of 50 bps in the upcoming policy review,” said Suman Chowdhury, Acuité Ratings & Research, Chief Analytical Officer.
Subsequently, the central bank is expected to begin dialing down the pace of interest rate hike with a likelihood of a modest 30-35 bps rate hike in the December MPC and pause thereafter. “However, this view is subject to the evolving inflation trajectory and any other upside surprises from an inflation perspective. The narrative for the upcoming MPC meet will not just be driven by the concerns on the inflationary trajectory but the sharply rising interest rates in the developed economies that continue to have an impact on the INR and India’s foreign exchange reserves,” Chowdhury added.