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Mumbai: The Reserve Bank of India is expected to announce a 50bps hike in the upcoming policy review in September even as it keeps the terminal repo rate forecast unchanged at 6.5%, according to economists at Morgan Stanley Research.

In a note penned by economists Upasana Chandra and Bani Gambhir, the research house said that it had estimated a 35 basis points hike in the policy rate in the upcoming policy. However sticky inflation and hawkish stance of other central banks warranted a change in expectation.

"We believe normalizing real rates is warranted in a challenging external environment," it said. "We believe that in the review on September 30, the Monetary Policy Committee (MPC) is likely to increase the repo rate 50bp, to 5.9%, with an unchanged stance," it said. The MPC will meet again from 28 to 30 September.

Inflation has been range bound around the 6-7% mark since January 2022. Morgan Stanley expects inflation to remain sticky around 7.1-7.4% in September, driven by increases in food prices as per high-frequency food price trend. Thereafter, it expects the trend to moderate but remain above 6% until February 2023.

"Risks to the inflation outlook are skewed to the upside due to uncertainty around food inflation trajectory (sowing for rice, pulses is lower YoY), changes in global commodity prices and possibility of imported inflation if exchange rate weakens amid dollar strength," it said.

Even as global commodity prices continues to remain above the pre- pandemic level, Morgan Stanley expects the current account deficit to track near 10-year high of 5% of GDP by end September -22. "While the CAD has widened, a turn in FII flows in Aug, alongside FX intervention by RBI (FX reserves are down US$20.8bn since July end) have helped to keep the currency steady. We expect the CAD to narrow to around 3% of GDP in QE Dec-22," it said.

That said high-frequency domestic demand indicators are reflecting continued broad-based recovery. Slower global growth is reflected in a moderating trend in export growth. Healthy domestic demand will likely provide a partial offset to external slowdown. We project GDP growth at 7% in Fy23 and 6.4% in FY24, it said.

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