At a time when central banks are tightening monetary policy to control inflation globally, Monetary Policy Committee of Reserve Bank of India (MPC) is scheduled to meet this week to decide on interest rates in the country. While there is general consensus that the RBI will hike the key repo rate, experts differ on the quantum. An analyst survey conducted by News18.com suggests that the RBI may hike the repo rate by 25-50 basis points (bps) this week, with most experts predicting a 25-35 bps hike.
The MPC decides to increase the repo rate, called monetary tightening, when it is needed to control inflation in the country. It is mandated by RBI regulations to control inflation within 2-6 per cent.
At present, retail inflation, which the central bank takes as a reference for its policy review, stands at 7.01 per cent. Though CPI inflation at 7.01 per cent in June is slightly lower than 7.04 per cent in May, it is still above the RBI’s tolerance limit.
“As commodity prices have come down from their recent peak, this will have some cooling effect on inflation but there is a weakness in Rupee can wipe out these benefits,” India Sunil Kumar Sinha, Principal Economist, Ratings said. He said that from July 2022, the base effect will also become unfavourable.
India Ratings expects July 2022 inflation to be 20-30 bps higher than June 2022 inflation. It expects the RBI to introduce monetary tightening and hike the policy rate by 25-35 bps in its August 2022 monetary policy review.
The domestic currency has lost nearly 8 per cent against the US dollar so far this calendar year. This is due to continued outflow of foreign investment, rise in crude oil prices, tight monetary policy by the US Federal Reserve and general dollar strengthening. It recently touched its lowest level of 80 against the dollar before recovering at 79.05 per dollar on Monday (August 1).
The three-day meeting of the six-member MPC is scheduled during August 3-5, and the policy decision will be announced on the last day of the meeting (August 5).
Vivek Iyer, Partner and Leader (Financial Services Risk), Grant Thornton India, said, “We expect a 25-bp hike in interest rates, as global supply chain disruptions and its impact on inflation continue. Additionally, currency volatility remains a reality and hence, an increase in rates appears to be on the cards.
Bank of Baroda Chief Economist Madan Sabnavis expects a 25 bps hike in the repo rate. They said fixed deposit facility (SDF), reverse repo and cash reserve ratio (CRR) are expected to remain the same.
Suvodeep Rakshit of brokerage firm Kotak Institutional Securities expects a 50-basis-point hike in the repo rate; Digital loan distributor Apna Paisa KV Swaminathan sees it grow 35 bps; And Atul Monga of fintech company Basic Home Loan says it could grow by 25-35 bps.
Arun Malhotra of investment management and advisory firm Capgro Capital has forecast a growth of 25 bp; And Vijay Singhania of brokerage firm TradeSmart says the policy rate is likely to rise by 30-50 bps.
In the last monetary policy review in June, the RBI’s MPC raised the repo rate by 50 basis points to 4.9 per cent. This was the second hike in a month after off-cycle monetary policy hiked 40 basis points in May.
At present the repo rate is 4.90 percent, SDF 5.65 percent, marginal standing facility 5.15 percent, bank rate 5.15 percent and reverse repo rate 3.35 percent.
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