Economy
A Mint poll says this is what RBI is likely to do this week
Summary
The RBI, determined to tame inflation, may raise the repo rate by a steep 50 bps and increase the CRR at its meeting this week, according to a Mint poll of economists. The central bank’s MPC will meet from 6 to 8 June, following an off-cycle hike in repo rate and CRR in early May. One basis point is one-hundredth of a percentage point.MUMBAI : The Reserve Bank of India (RBI), determined to tame inflation, may raise the repo rate by a steep 50 basis points and increase the cash reserve ratio (CRR) at its meeting this week, according to a Mint poll of economists.
The central bank’s monetary policy committee (MPC) will meet from 6 to 8 June, following an off-cycle hike in repo rate and CRR in early May. One basis point is one-hundredth of a percentage point.
Five out of 10 economists polled by Mint expect MPC to raise the repo rate from the current 4.4% to 4.9%, while the rest expect a 35-40 bps rate hike to 4.75-4.8%. Half of those polled also expect a 25-50 bps hike in CRR, or the share of deposits that banks have to hold as reserve with RBI. Since the surprise 40 bps hike in May, the first increase in nearly two years, inflationary pressures have risen further. Moreover, with retail inflation touching 7.79% in April, the government has announced several measures to contain the prices of essential goods, banning or restricting exports of wheat, sugar and iron ore. Therefore, the majority of economists expect the monetary policy committee to revise its inflation forecast higher to 6.4-7.2% from the current 5.7%.
“Given the central bank’s desire to signal that inflation management remains key for its policy objectives, we believe RBI will stay the course and deliver a 50 bps hike in the repo rate in June, taking it to 4.90%. We expect the decision to be unanimous, and also see the bank raising its inflation forecasts and downgrading its growth projections for FY22-23," said Rahul Bajoria, chief economist, Barclays Bank.
At the May meeting, the central bank also raised CRR by 50 basis points to 4%, taking ₹87,000 crore of liquidity out of the system, with inflation remaining above the RBI’s tolerance limit since January.
MPC members, however, remain divided over the future course of rate action, with Jayanth Verma calling for an immediate hike of 100 bps. Verma has said that RBI has to hike rates aggressively till inflation falls to 5%. Other members, however, favour a less aggressive and calibrated rate action. “With near-term growth impulses largely stable, we expect the RBI to remain focused on inflation. The RBI had projected FY23 GDP growth at 7.2% year-on-year in its April policy meeting, and despite the growth risks, we do not anticipate a material downgrade of this outlook in the upcoming June policy meeting. However, with inflation poised to average 7.2% year-on-year in FY23 in our view (versus the RBI’s forecast of 5.7% projected in April), we see a straightforward case for frontloaded hikes ...we maintain our terminal repo rate forecast of 6.25% by April 2023," Nomura said in a research report.
