Uday Kotak suggests 1% rate hike in FY2023, presents roadmap for RBI to get to 0% real interest rate

The Reserve Bank of India needs to raise benchmark interest rates by 1 per cent by the end of this year, In order to counter high inflation, Uday Kotak, the billionaire banker and the chief executive officer of Kotak Mahindra Bank said. Kotak suggested that the central bank could raise rates four times this fiscal, with hikes of a quarter percentage each. “Sharp increase in inflation estimate to 5.7% from 4.5% assuming 100$ oil. Exit q4 fy23 estimate 5.1%. Present Repo rate at 4%. If India has to move to 0% real rate that is inflation – interest rate =0, we need 1% increase of rates. 4 rate hikes of a quarter each?,” Kotak said in a tweet Sunday.

In its first bi-monthly monetary policy meeting for the fiscal 2023, the RBI’s monetary policy meeting decided to keep repo and reverse repo rates unchanged at 4 per cent and 3.35 percent respectively and reiterated an accommodative stance. However, the RBI recognised the implications of the Ukraine-Russia war, and raised inflation expectations for the current fiscal from 4.5 per cent, 5.7 per cent. RBI also said its forecast is based on the assumption that oil prices are at $100 per barrel. In an earlier meeting, which was before the crisis in Ukraine erupted, RBI had assumed crude oil prices at $75 per barrel.

Uday Kotak gave his view after the RBI’s announcement and said based on RBI’s estimate of 120 basis points increase in inflation for the full year, and 5.1 per cent inflation in the fourth quarter, India needs to move to a real rate of interest of 0 per cent. Real rate of interest adjusts the observed market interest rate for the effects of inflation, according to Investopedia. The real interest rate reflects the purchasing power value of the interest paid on an investment or loan and represents the rate of time-preference of the borrower and lender, according to the financial website.

Experts said RBI’s eyes are on the withdrawal of pandemic-era liquidity and monetary support it offered the economy. Economists with Emkay Global, Barclays India and Kotak Mahindra Bank, expect the central bank to move towards a neutral stance in the next policy meeting in June and start the process of raising interest rates from the August meeting onwards.