Repo rate hike of 35-50 bps likely after inflation spike | The Financial Express

Repo rate hike of 35-50 bps likely after inflation spike

At next meet, MPC may find itself in a bind over balancing the needs of price control & growth

Repo rate hike of 35-50 bps likely after inflation spike
RBI Governor Shaktikanta Das expects inflation to fall within the target band of 4-6% only by Q1FY24, when it should stand at 5%.

Economists and market watchers expect the Reserve Bank of India (RBI) to hike the repo rate by 35-50 basis points (bps) after consumer inflation rose to 7% in August, reversing a three-month trend.

The central bank’s monetary policy committee (MPC), which meets next on September 28-30, is likely to find itself in a bind over balancing the needs of price control and growth, with India’s factory output growing just 2.4% in July. In the last few weeks, RBI governor Shaktikanta Das has said on multiple occasions that inflation peaked in April and is expected to only trend down thereafter.

Also Read: Inflation rises to 7 per cent in August; RBI may hike interest rate again later this month

Rahul Bajoria, MD & chief India economist, Barclays, said that from a policy perspective, another month of above-target inflation clears the path for further monetary tightening at the next MPC meeting. “While several supply issues appear in control, and inflation projections are biased lower, we still sense that the relatively resilient growth outlook, coupled with strong credit growth and sticky core inflation, will keep the RBI’s focus firmly on managing inflation. We now expect the RBI to deliver another 50-bps rate hike in September, taking the repo rate to 5.90%, which should also be the time when real rates reach levels desired by the MPC,” Bajoria said.

In its August policy, the MPC’s forecast for inflation was 6.7% in FY23. Das expects inflation to fall within the target band of 4-6% only by Q1FY24, when it should stand at 5%.

A report by economists at State Bank of India (SBI) characterised the August inflation spike as a supply-driven phenomenon. Supply-side factors, which were responsible for 65% of CPI inflation in May, had dropped to 58% in July only to rise to 61% in August, possibly reflecting the increase in unseasonal rains, the report said.

Also Read: 5 ways to save & invest when inflation is high

“We believe the RBI is likely to raise rates in September policy and it could be a close call between 35 and 50 basis points. Beyond September, we are penciling in a minimal and token rate increase as inflation is likely to fall in a jiffy in H2FY23,” SBI researchers said. The central bank is expected to ease off on its hawkish stance in the coming days. While the RBI is still far from its supposed neutral rate, it may be close to the peak of its hawkishness, led by falling risk premia of the entire commodity price complex, said a report by Emkay Global Financial Services. “We believe FY23 could see the RBI’s policy rates terminating around 5.75% (+10/15bps), with the central bank showing its intent to keep real rates near the estimated natural rate,” Emkay said.

Get live Share Market updates and latest India News and business news on Financial Express. Download Financial Express App for latest business news.