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Home / Economy / Repo rate may go up by 50bps: Mint poll

MUMBAI : The Reserve Bank of India’s monetary policy committee (MPC) may raise the benchmark repo rate by 35-50 basis points at its meeting this week, a Mint survey of economists showed, amid central banks worldwide raising borrowing costs to cool prices.

Half of the 10 economists surveyed expect a 35 bps hike in repo rate to 5.25%, while the other half expect a sharper rate hike of 50 bps to 6.4%. The committee will also likely change its stance to ‘calibrated tightening’ from ‘withdrawal of accommodation’.

The MPC, which meets from 3 to 5 August, has increased the repo rate by 90 bps in two tranches since May, taking it to 4.9%. On Wednesday, the US Federal Reserve raised its policy rate by 75 basis points for a second consecutive time, taking it to 2.25-2.50%.

“We expect RBI to hike repo rate by 50 bps in the coming policy. While some of the early signs of inflation moderation are visible, we believe external sector risks abound and to offset, at the margin, the increasing pressure on the rupee, RBI should frontload the rate hikes even as the overall terminal rate may not eventually be very high. We expect an 85 bps hike in repo rate to 5.75% by end 2022," said Upasana Bharadwaj, chief economist, Kotak Mahindra Bank.

The majority of the economists said inflation has peaked, and the recent moderation in commodity prices could result in an improvement in the near-term inflation trajectory. Retail inflation was marginally down to 7.01% in July from 7.04% in June due to moderation in food inflation. That said, the inflation rate remains above the 7% mark for the third month and higher than RBI’s medium-term flexible inflation target of 4%, plus or minus 2%, for two consecutive quarters.

None of the economists polled expects RBI to change its inflation and growth forecasts of 6.7% and 7.2%, respectively. However, some expect RBI to revise the first quarter and second quarter inflation forecast lower, given the impact of lower commodity prices worldwide and to soften food prices due to several supply-side interventions by the government. RBI has projected Q1 inflation at 7.5% and Q2 inflation at 7.4%.

“Communications from the central bank, its external members and staff publications have all shown a discernible shift in tone, with members expressing some comfort with the evolving inflation trajectory, noting a preference for fiscal policy to mitigate price pressures, and arguing that the MPC should not impose an unacceptable growth sacrifice. While we do not believe this shift in tone signals an imminent end to the rate hiking cycle, it does show policymakers’ disagreement with aggressive market rate hike pricing, and perhaps an attempt at guidance towards a lower terminal rate in the current cycle," said Rahul Bajoria, chief India economist, Barclays Bank.

“While we do not believe that RBI will take liquidity levels back to deficit conditions, the removal of close to 6 trillion from the banking system since April 2022 has gone a long way in tightening domestic financial conditions and facilitating faster transmission of policy rate hikes, while also helping to reduce demand-side pressures in the economy," Bajoria added.

Since the last policy, the rupee has touched a low of 80.06 against the dollar.

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