Home / News / India /  RBI monetary policy: How much rate hike is on the cards
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RBI governor Shaktikanta Das along with other members of the monetary policy committee (MPC) are set to begin the three-days meeting on August 3. The MPC will discuss the bi-monthly monetary policy for FY23 and the outcome will be announced on August 5. The outcome of a 'status quo' or 'rate cut' is no more in question. Inflation is the biggest elephant in the room and has risen to a multi-year high forcing major central banks globally to opt for rate hikes. US Fed has made another aggressive rate hike by 75 basis points in the latest policy to tame inflation. RBI is also expected to hike the rate for the third consecutive time. Experts predict a rate hike of 25-50 basis points from RBI in this upcoming policy. 

Lakshmi Iyer, Chief Investment Officer (Debt) and Head Products, Kotak Mahindra Asset Management Company said, “From to hike or not earlier this year, the key question for policymakers is how much to hike! US Fed seems to be running a Sprint as far as rate hikes are concerned. Most Other economies may not have the luxury of a marathon race hence."

“We expect RBI MPC to hike the benchmark repo rate by 50bps as CPI continues to rule above RBIs threshold band. Commentary maybe neutral/dovish as CPI trend seems to be following RBIs forecast for FY 2023. Key to watch also would be the guidance if any in the future course of rate moves," Iyer added. 

RBI began the rate hike cycle in May this year with a surprise 40 basis points increase in repo rate followed by another hike of 50 basis points in June. So far, RBI has hiked the repo rate by 90 basis points unlike US Fed's 225 basis points hike in their key rate to tackle stubborn inflation.

India's central bank is inflation trajectory and its policy outcomes surround the movement of CPI. Currently, inflation is at 7.01% in June and has been above RBI's comfort zone of 6% for the sixth-consecutive month.

During June 2022 policy, RBI predicted inflation to stay above 6% till Q3 of FY23 and only come below 6% fractionally in Q4. On the assumption of a normal monsoon in 2022 and an average crude oil price (Indian basket) of $ 105 per barrel, RBI projected inflation at 6.7% in 2022-23, with Q1 at 7.5%; Q2 at 7.4%; Q3 at 6.2%; and Q4 at 5.8% with risks evenly balanced.

At present, the policy repo rate is at 4.90%. Consequently, the standing deposit facility (SDF) rate stands adjusted to 4.65% and the marginal standing facility (MSF) rate, and the Bank Rate to 5.15%.

Also, RBI decided to remain focused on the withdrawal of accommodation to ensure that inflation remains within the target going forward while supporting growth.

For the August policy, For the August policy, Churchil Bhatt, Executive Vice President Debt Investments, Kotak Mahindra Life Insurance Company, said “The upcoming August RBI policy will likely mark the end of an era characterized by outsized, at-any-cost rate tightening with a 35bps hike in policy rates. MPC may hint at a bit more moderate, data-dependent policy adjustments thereafter while persisting with ongoing withdrawal of system liquidity. From a medium term perspective, trajectory of Repo Rate remains a function of global inflationary dynamics."

"In our view, while inflation may have peaked for now, but it is far from dead. Unless supply is augmented in energy and industrial commodities, any growth impulse will lead to an accompanying rise in inflation, especially since the Ukraine situation is far from over. Therefore, any hint of a pause in rate hiking cycle may be treated as just that, with all possibilities open depending upon evolving growth inflation dynamics," Bhatt added.

In terms of market reaction towards RBI's policy, Mitul Shah- Head of Research at Reliance Securities said, the RBI is expected to raise interest rates again by 35-50bps this week.

Shah added, "Commodity prices have started softening and overall retail inflation is being mitigated. However, food inflation is still a major concern due to the sporadic and unequal monsoons. The Russia-Ukraine war and concerns of COVID continue, to play a key role in affecting global markets. The FED, in its meeting earlier this week, raised interest rates by 75bps to tackle inflation, while U.S. GDP declined for the second consecutive quarter, highly indicative of a recession. Concerns of a depreciating rupee, widening trade deficit, FII selling, and volatility in global crude prices remain intact. However, we expect a strong economic rebound, normalized commodity prices, inflation within a targeted range, and better visibility in 2HFY23."

On Monday, Sensex closed at 58,115.50 higher by 545.25 points or 0.95%. Nifty 50 ended at 17,340.05 up by 181.80 points or 1.06%.


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