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US Fed impact on RBI repo rate: MPC may raise interest rate this much, maintain inflation, GDP forecast

After the US Fed on Wednesday raised interest rates by 75 basis points as expected, analysts now expect the Reserve Bank of India to hike repo rate by 25-35 bps in the upcoming Monetary Policy Committee meeting in August.

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RBI may hike rates by only 25bps in August 2022, followed by another 25bps rate hikes in the next two meetings

After the US Fed on Wednesday raised interest rates by 75 basis points as expected, analysts now expect the Reserve Bank of India to hike repo rate by 25-35 bps in the upcoming Monetary Policy Committee meeting in August. RBI may hike repo rate to take it to 5.25%, higher than pre-pandemic level, with stance change to calibrated tightening from withdrawal of accommodation, they said. August rate hike may be followed by another two hikes in consequent next MPC meetings. Since April this year, the central bank has effectively raised rates by 130 bps or 1.3 percentage points. While the possibility of a 50 bps hike is very less, it cannot be ruled out.

25 bps hike in August MPC followed by another 25 bps rate hikes in next two meetings

“While the US Fed has raised rates by 225 bps in CY22, RBI has raised repo rate by 90 bps. Aggressive rate hikes by the Fed are feeding expectations that the RBI may also front load its rate hikes. However, conditions in India do not warrant an aggressive stance by the RBI. This is because domestic inflationary pressures have shown signs of stabilisation. Retail inflation in India surged to 7.3% in Q1FY23 and is likely to remain elevated in Q2FY23, led by base effect. Further, risks to the inflation outlook have subsided,” said Bank of Baroda Economist Aditi Gupta.

“Global commodity prices, including oil, have moderated from their peaks. Further, after depreciating sharply in Jun and Jul’22, 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. Hence we expect that RBI may hike rates by only 25bps in August 2022, followed by another 25bps rate hikes in the next two meetings,” she added.

35 bps hike with a hawkish guidance to be appropriate in August MPC

The RBI will remain focused on clamping down domestic inflation in the August policy, According to Suvodeep Rakshit, Senior Economist, Kotak Institutional Equities. “With no surprises from the Fed, we expect the RBI to remain on track to hike repo rate by 35 bps while maintaining a hawkish stance. While the Fed’s moves has been feeding into the INR weakness against the dollar, the RBI has been using its FX reserves to address the resultant volatility. We believe that a 35 bps hike with a hawkish guidance will be appropriate to acknowledge (1) elevated but falling inflation trajectory, (2) being in line with global monetary policy while reacting to domestic macro situation, and (3) reverting gradually to usual rate hikes while remaining hawkish. Arguably, the choice is finely balanced between a 35 bps hike and a 50 bps hike in the August policy,” he said.

MPC likely to retain CPI, real GDP growth forecasts

Analysts at Bank of America (BofA) Securities expect RBI MPC to hike policy repo rate by 35 bps in August meeting, taking it to 5.25% (higher than pre-pandemic level), with stance change to calibrated tightening from withdrawal of accommodation. “We expect the RBI MPC to retain their CPI (inflation) and real GDP growth forecasts. Alternatively, the MPC could choose to hike by a more aggressive 50 bps – same as Jun, joining some DM and regional central banks in sending a more decisive signal,” they said. On the other hand, the possibility of 25 bps can’t be completely ruled out. The MPC could acknowledge that inflation has peaked and cite downside risks to their estimates, resorting to standard, more measured hikes, they added.

MPC may slow down its aggression

“US Fed hiked the policy rates by 75 bps which was on expected lines and largely factored in by the market. Moreover, the tone of the Fed’s chairman was less hawkish compared to previous statements which receded some fears and uplifted the sentiments. Going ahead, the rate hikes would be more data driven and would be determined by the behaviour of inflation. Fed chairman ruled out US recession possibility also at this juncture. We expect it to have a positive rub off on the RBI MPC where the latter might slow down its aggression and hike rates by 25bps in its next MPC,” said Siddhartha Khemka, Head-Retail Research, Motilal Oswal Financial Services.

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