As inflation has been above the central bank’s tolerance limit for several months, the RBI’s six-member Monetary Policy Committee (RBI)MPC) Raising policy interest rates is almost certain. While rate hikes are inevitable, as Das said in June, the question is 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 available data. It has remained above 6 per cent since January.
“We expect the RBI to hike the repo rate by 40 bps in the June policy meeting. However, we should be open to a rate hike of between 35-50 bps, depending on whether the MPC is 5.15 per cent. How does one want to reach the pre-pandemic repo rate of Rs. or around that mark by the end of August’s policy,” said Suvodeep Rakshit, Senior Economist, Kotak Institutional Equities.
The central bank in its off-cycle monetary policy review in May raised the policy repo rate by 40 basis points, or 0.40 per cent, to 4.4 per cent. For the first time in nearly two years, the policy repo rate has been increased. Repo rate is the interest rate at which the Reserve Bank of India lends short-term cash to banks. Since the beginning of the year, inflation has remained above the RBI’s target range of 2-6 per cent.
Bank of America Securities has said in a research note that retail inflation in May is likely to be around 7.1 percent. Bank of America Securities said CPI-based inflation is expected to average 6.8 per cent during the current fiscal.
Given the recent increase in inflationary pressures, the RBI is expected to raise its inflation forecast for the current fiscal to above 6 per cent. RBI raised its inflation forecast for the current fiscal to 5.7 per cent in April, from 4.5 per cent in February.
According to Bank of America Securities, the RBI is likely to further raise its inflation expectation to 6.5 per cent for the current fiscal. The RBI is likely to make this upward revision in the inflation forecast in the next week or so in August.
“With the hike in the repo rate, the RBI will also revise its inflation projections, possibly indicating inflation to remain close to 7 per cent for the most part of CY 2022,” Rakshit said.
“We expect the RBI to continue to focus on inflation and signal its intention to raise rates and normalize liquidity, while not losing it entirely given the uneven nature of growth recovery,” he said.
Emphasizing on the need for a hike in policy rates, Churchill Bhatt, Executive Vice President, Kotak Mahindra Life Insurance Company, said, “The fight of policy makers against the failure to control the genie of inflation should scare off more markets. We ask MPC We expect to deliver a 25-40 (basis point) bps hike in policy rates in June without any thought.”
According to Bank of America Securities, RBI may increase the policy rate by 0.40 per cent next week and 0.35 per cent in August.
According to a study by HDFC Bank Treasury Research Desk, the RBI is projected to raise the policy rate by 25 basis points while maintaining its stance and the CRR rate.
“We lean towards an increase of 25 bps instead of 50 bps as we do not see a compelling case for a larger rate increase at this stage,” it said.
It expects the RBI to reduce its inflation forecast from 5.7 per cent to 70-80 per cent in view of changes in global and domestic price pressures.
According to Yes Bank Chief Economist Indranil Pan, the inflationary surprise has highlighted the need for RBI to tighten monetary policy.
“We see the RBI expanding its repo growth by 40 bps in May to 35 bps in June, followed by 25 bps each in August and September. By this time, we expect That global growth has softened enough to drag commodity prices down and thus provide some relaxation to the domestic inflation cycle as well.”
According to Trehan Group Managing Director Summary Trehan, RBI may increase key policy rates by up to 50 basis points. This will eventually be passed on to the borrowers through banks. However, given the current historically low mortgage rates, he believes it will have little impact on demand.
“We expect the policy rate to go up by 35-50 bps. The RBI, however, is likely to provide continuous liquidity support through the LAF window to sustain the growth process. It also tightens the government borrowing schedule while controlling yield through policy diversion,” credit rating agency Infomerics said.
According to Anand Nevatia, Fund Manager, Trust Mutual Fund, RBI currently prefers inflation targeting over growth. “We expect rate hike of 35-50 bps along with hike in CRR to infuse liquidity,” he added.
(with agency input)