The Reserve Bank of India (RBI) may hike the policy repo rate to 6.75% by next year due to core inflation still being elevated and the US Federal Reserve maintaining a hawkish stance with an outlook for further rate hikes. This means, there is room for at least another 50 bps hike in India's policy repo rate going forward.
In an interview with PTI, Arun Bansal, executive director, and head of treasury at IDBI Bank said, "The focus will now be on core inflation that continues to be above 6%. Some other components in inflation have also shown an uptick. So, it is too early to say that inflation has come within the RBI's tolerance band."
He added, "The RBI will also have to be mindful of the rupee's depreciation and the narrowing interest rate differential with the U.S...There is still a 60% probability that the terminal repo rate is hiked to 6.75%."
According to IDBI Bank's treasury head, Fed is likely to raise rates to above 5% in 2023, which may force India's central bank to also follow suit.
Bansal also expects the Indian rupee to remain vulnerable against the US dollar with a possibility of touching fresh lows as the greenback is seen to pick up momentum again. He expects another 1.00-1.50 rupee move on the exchange rate against the dollar on the downside.
In December 2022 policy, RBI hiked the repo rate by 35 bps to 6.25%, however, maintained its withdrawal of accommodation stance. So far in FY23, RBI has hiked the repo rate by 225 bps.
In the minutes of the meeting on Wednesday, RBI governor Shaktikanta Das said, "considering the elevated inflation levels, especially the stickiness in core inflation, further calibrated monetary policy action is warranted to contain build-up in underlying inflationary pressures, keep inflation expectations anchored, and bring inflation closer to the target rate of 4% over the medium term."
Das believes that this would strengthen the medium-term growth prospects of the Indian economy.
Further, Das said, "it would be prudent to keep Arjuna’s eye on the evolving inflation dynamics and be ready to act as may be necessary. Monetary policy has to be nimble to address any emerging risk to the price stability while keeping in mind the objective of growth."
At the interbank forex market, on Wednesday, the local unit dropped slightly against the US dollar to close at 82.81 compared to the previous day's 82.7550 per dollar levels. However, rupee-forward premiums were over 2% nearing their highest level in a month.
