The RBI is expected to raise the repo rates by 35-50 bps in its September Monetary Policy Committee (MPC) meeting. It may be noted that the Reserve Bank of India has already increased the repo rate to 5.4 per cent, hiking it by 140 basis points since May this year. A 50 bps increase in key policy rates again this time will take it to a three-year high of 5.9 per cent. All eyes will be on RBI Governor Shaktikanta Das on Friday, 30 Sep 2022, who, in the previous policy review, had said that ’50 is the new normal for central banks’. The monetary policy committee is likely to take cues from its global counterparts, including the US Federal Reserve, to raise interest rates for the fourth time in a row. Last week, the US Fed clearly signalled that it is willing to tolerate a recession to get inflation back in control when it raised the rate by another 75 bps.
The US Fed seems to be on a roll with the pace and quantum of rate hikes. The US dollar has been steamrolling both EM and DM currencies alike. Hence despite no major adverse data points in India, RBI MPC may be tempted to deliver a 50 bps rate hike at the upcoming policy . Tone and texture of the guidance could be key for the markets. We could also see some small downward tweaks to GDP growth forecasts with CPI forecasts likely to remain unchanged.
FY23 inflation will average close to 6.5%: Madhavi Arora, Harshal Patel, Research Analysts, Emkay Global Financial Services
Even as H1FY23 inflation may turn out to be modest 15bps lower than the RBI’s forecast, underlying core inflation still appears sticky around >6% levels. Fall in global commodity prices is a tailwind, but favorable impact is likely to be centered on core goods WPI rather than CPI. Early signs of rising services costs in the economy could be another pressure point. Besides, exchange rate depreciation pass-through (though limited, albeit increasing) could increase additional price pressures ahead, which could partly counter commodity price fall. We maintain FY23 inflation will average close to 6.5% (RBI: 6.7%), while our growth forecast of 7% now has a downward bias, amid global ultra restrictive policies and impact of front-loaded RBI hikes.
The market’s opinion is still divided on 35bps vs. 50bps hike this week. While there are merits in favor of a 35bps hike (nascent credit cycle, limited fiscal impulse, and better transmission amid tighter liquidity to name a few), the net cost of soft signaling could turn out to be higher than that of an outright front-loaded 50bps hike at this point.
MPC will continue with calibrated repo rate hikes: Suvodeep Rakshit, Senior economist at Kotak Institutional Equities
Inflation prints over the coming months are expected to remain elevated albeit moderating gradually to below MPC’s upper threshold of 6% in 4QFY23. With the MPC expected to continue with rate hikes, the lagged impact of monetary tightening will help curb inflation expectations. Accordingly, we expect the average CPI inflation trajectory to be lower than the RBI’s estimates by around 60 bps in 1HCY23. We maintain our FY2023E CPI inflation estimate at 6.5%. We retain our view that the MPC will continue with calibrated repo rate hikes towards 6% by end-CY2022 with 35 bps hike in the September policy along with the shift in the operating target from SDF to repo rate by end-FY2023.
More rate hikes to impact real estate sector: Shishir Baijal, Chairman and Managing Director, Knight Frank India
With liquidity withdrawal measures and interest rate hikes, the global economic landscape continues to be volatile and developments there will have a bearing on developing markets. In the case of India, at the 7% level now, we are witnessing consistently elevated inflation level, which remains way ahead of RBI’s target rate of 4%. However, the domestic economy is in the initial stages of economic recovery. It is crucial to support the strength of domestic demand, which has already seen some impact as reflected in reduced GDP growth expectations for the current fiscal. In this light, a significant rate hike will serve as a dampener to the economic momentum, and we think that the central bank will have to do a balancing act between price stability and supporting domestic demand. The country’s housing sector too has recently started to make a demand recovery after a long down cycle till the pandemic struck severely. The real estate sector needs further support in terms of low home loan interest rate, which at this juncture has seen a transmission of more than half of the 140-basis point policy rate hike by the central bank. Further rate hikes will have an adverse impact on the real estate sector, which is a huge employment generator and contributor to the GDP of the country.