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RBI to hike repo rates, raise inflation prediction today: Experts

Shaktikanta Das, governor of the Reserve Bank of India (RBI), attends a news conference at the bank's headquarters in Mumbai, India, on April 8, 2022.Photographer: Dhiraj Singh/Bloomberg (Bloomberg)Premium
Shaktikanta Das, governor of the Reserve Bank of India (RBI), attends a news conference at the bank's headquarters in Mumbai, India, on April 8, 2022.Photographer: Dhiraj Singh/Bloomberg (Bloomberg)

According to market experts and economists, the Reserve Bank of India (RBI) is expected to raise the policy repo rate by 40 basis points to 4.80 percent on June 8 and raise the inflation prediction for the current fiscal year to above 6 percent from its previous expectation of 5.7 percent.

According to market experts and economists, the Reserve Bank of India (RBI) is expected to raise the policy repo rate by 40 basis points to 4.80 percent on June 8 and raise the inflation prediction for the current fiscal year to above 6 percent from its previous expectation of 5.7 percent. RBI Governor Shaktikanta Das stated in a recent interview that rate hikes in June were a "no-brainer."

As inflation has been above the central bank's tolerance limit for several months, the RBI's six-member Monetary Policy Committee (MPC) is almost certain to raise policy interest rates. While a rate hike is unavoidable, as Das stated in June, the question is by how much.

In April, India's Consumer Price Index (CPI)-based inflation hit an eight-year high of 7.79 percent, according to the most recent figures available. Since January, it has been above 6 percent.

"We expect the RBI to hike repo rate by 40 bps in the June policy meeting. However, we should be open for a rate hike between 35-50 bps hinging on how the MPC wants to reach the pre-pandemic repo rate of 5.15 percent or around that mark by the end of August policy," said Suvodeep Rakshit, Senior Economist at Kotak Institutional Equities.

The central bank raised the policy repo rate by 40 basis points, or 0.40 percent, to 4.4 percent at its off-cycle monetary policy review in May. The policy repo rate was raised for the first time in nearly two years. The repo rate is the interest rate at which the Reserve Bank of India lends banks short-term cash. Since the beginning of the year, inflation has been above the RBI's target range of 2-6 percent.

Bank of America Securities said in a research note that the retail inflation is likely to be around 7.1 percent in May. CPI-based inflation is likely to average 6.8 percent during the current financial year, Bank of America Securities said.

The RBI is expected to raise its inflation projection for the current fiscal year to above 6 percent, given the recent increase in inflationary pressure. The RBI raised its inflation forecast for the current financial year to 5.7 percent in April, up from 4.5 percent in February.

According to Bank of America Securities, the RBI is likely to further raise its inflation expectation for the current financial year to 6.5 percent. The RBI is likely to do this upward revision in inflation projection either next week or in August.

"Along with the repo rate hike, the RBI will also revise its inflation estimates higher, possibly indicating inflation remaining close to 7 percent for the most part of CY 2022," said Rakshit.

"We expect the RBI to continue focusing on taking inflation and signalling its intent to continue raising rate and normalising liquidity, while not entirely losing it's on growth given the uneven nature of growth recovery," he said.

Pitching for a need to hike policy rates, Churchil Bhatt, Executive Vice President, Kotak Mahindra Life Insurance Company, said, "Failure to contain the inflation genie should scare the markets more than the policymaker's fight against it. We expect the MPC to deliver a no-brainer policy rate hike of 25-40 (basis points) bps in June."

The RBI is expected to boost the policy rate by 0.40 percent next week and by another 0.35 percent in August, according to Bank of America Securities.

According to a study by HDFC Bank Treasury Research Desk, the RBI is projected to boost the policy rate by 25 basis points while maintaining its stance and CRR rate.

"We tilt on the side of a 25 bps rate hike instead of 50 bps as we do not see a compelling case for a larger rate hike at this stage," it stated.

It expects the RBI to lower its inflation projection from 5.7 percent to 70-80 percent, noting changes in global and domestic price pressures.

The inflation surprise, according to Indranil Pan - Chief Economist at Yes Bank, has highlighted the need for RBI to tighten monetary policy.

"We see RBI extending its 40 bps repo hike of May with a 35 bps increase in June, followed by 25 bps each in August and September. By this time, we expect the global growth to have softened enough to pull down commodity prices and thus provide some comfort to the domestic inflation cycle too," he said.

RBI is likely to raise key policy rates by up to 50 basis points, according to Saransh Trehan, Managing Director of Trehan Group. It will eventually be passed on to borrowers via banks. However, given the current historically-low mortgage rates, he believes it will have little effect on demand.

"We expect the policy rate to go up by 35-50 bps. RBI is, however, likely to continuously provide liquidity support through the LAF window to sustain the growth process. It would provide support to the government borrowing programme while controlling the hardening of yield through policy twists," credit rating agency Infomerics said.

The RBI currently prioritises inflation targeting over growth, according to Anand Nevatia, Fund Manager at Trust Mutual Fund. "We expect a 35-50 bps rate hike along with a hike in CRR to bring down liquidity," he said.

(With agency inputs)

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