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Amid retail inflation showing signs of moderation and the need to push growth, the Reserve Bank of India (RBI) may signal a slower pace of tightening at its upcoming monetary policy review on Wednesday.

The RBI may opt for a lower rate increase of 25-35 basis points in lending rates after three back-to-back 50 basis points hike in interest rates, experts believe.

RBI Governor Shaktikanta Das headed six-member rate setting panel is scheduled to meet for three days beginning Monday to take a call on the next set of monetary policy.

The central bank will come out with its bi-monthly policy review on 7 December at the end of the three-day meeting.

Apart from the domestic factors, the RBI committee is expected to take some cues from the US Federal Reserve, which hinted at a lower rate hike of 50 basis later, in the month. 

In order to calm down inflation, the US Fed had earlier hiked the key interest rates four times by 75 bps each.

Assocham asks RBI to moderate rate hikes

Industry body Assocham has asked the RBI to moderate the interest rate hikes so that it does not have adverse impact on nascent economic recovery.

RBI's monetary policy outcome is likely to play a major role in setting the tone for domestic equities. The movement in markets will be determined by the outcome of the RBI policy meeting.

The central bank since May has increased the repo or benchmark lending rates by 190 basis points, to combat inflation, which has remained above its comfort level of 6% since January.

"We do believe that the MPC will continue with rate hikes this time though the magnitude will be lower -- probably 25-35 bps. More specifically we do believe that the terminal repo rate for the financial year will be 6.5%, which means there will be one more rate hike in February," said Madan Sabnavis, Chief Economist at Bank of Baroda.

Sabnavis further said there will not be any surprise for the market just as is the case for global markets too, which are now expecting more moderate increases in interest rates by the Fed.

CPI, GDP

The GDP growth in the second quarter of this financial year slowed to 6.3% as against a growth of 13.5% in the preceding three months.

Consumer price index (CPI) based retail inflation, which the RBI mainly factors in while arriving at its monetary policy, is showing signs of moderation but still remains above the central bank's upper tolerance level.

The second quarter inflation and GDP numbers are in line with the central bank's forecast, said DK Pant, Chief Economist at India Ratings & Research.

"Inflation is likely to decline further. However, it is expected to remain higher than 6 per cent in this quarter. We believe RBI may go for a 25 bps hike in repo rate in December 2022 monetary policy," Pant added.

Shanti Ekambaram, whole-time director, Kotak Mahindra Bank, said the RBI has been keeping a close tab on growth and inflationary trends, and future action will be based on data prints on both growth and inflation.

"We expect a lower rate hike -- 25 to 35 bps -- from the RBI and MPC given the last lower inflation reading and a slight softening in Fed speak. As on expected lines, inflationary trends would start showing a decline in the fourth quarter of the current fiscal," Ekambaram said.

The central bank has been tasked to ensure the retail inflation remains at 4% with a margin of 2%. However, it failed to keep the inflation rate below 6% for three consecutive quarters beginning January this year. So it had to submit a report to the government detailing reasons for the failure to contain prices and remedial steps to rein in the price rise.

Dhruv Agarwala, Group CEO, Housing.com, said that the RBI would go for yet another rate hike as the inflation targets remain elusive despite some reprieve on the price rise front.

Even though the quantum of the hike may be lower this time around, banks would have to eventually increase their interest rates, which will ultimately put upward pressure on mortgage rates, he said.

"While a slower GDP growth rate and rising interest rates are definitely worrisome for all industries, as far as the realty sector is concerned, there may be a short-term impact on the sector but its long-term growth remains intact," Agarwala said.

Earlier on 30 September, the central bank had hiked the repo rate by 50 bps with an aim to curb inflation. It was the third successive hike of 50 bps. Before the September hike, the RBI had raised the repo rate by 50 bps each in June and August, and 40 bps in May.

With agency inputs

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