RBI likely to hike policy interest rates

Mumbai: The Reserve Bank of India (RBI) is likely to hike the policy repo rate by 40 basis points to 4.80 per cent on Wednesday and increase the inflation forecast for the current fiscal to above 6 per cent from its earlier projection of 5.7 per cent, according to market analysts and economists.

The six-member Monetary Policy Committee (MPC) of the RBI is certain to hike the policy interest rates as inflation has remained above the central bank’s tolerance limit for the past several months.

In a recent interview, RBI Governor Das said that the expectation of rate hikes in June is a “no-brainer”.

While the rate hike is certain, as RBI Governor Shaktikanta Das had indicated last month, the question remains on by how much?

“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 per cent or around that mark by the end of August policy,” said Suvodeep Rakshit, Senior Economist at Kotak Institutional Equities.

Last month, in its off-cycle monetary policy review the central bank hiked the policy repo rate by 40 basis points or 0.40 per cent to 4.4 per cent. This was the first increase in the policy repo rate in nearly two years. The repo rate is the interest rate at which the RBI lends short-term funds to banks.

Inflation has been above the RBI’s 2-6 per cent target band since the beginning of this year.

As per the latest available data, India’s Consumer Price Index (CPI) based inflation surged to an eight-year high of 7.79 per cent in April. It has been above 6 per cent since January 2022.

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

Considering the recent uptick in inflationary pressure, the RBI is likely to revise the inflation forecast for the current financial year to above 6 per cent.

In April, the RBI revised upward the inflation forecast for the current financial year to 5.7 per cent from its earlier projection of 4.5 per cent announced 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 per cent. 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 per cent 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 its 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.”

According to Bank of America Securities, the RBI is likely to raise the policy rate by 0.40 per cent next week and by another 0.35 per cent in August.

The RBI may increase the repo rate by another 0.40 per cent next week. Apart from this, in the August review also, it can increase by 0.35 per cent. If this does not happen, then the RBI can make up its mind to increase by 0.50 per cent next week and 0.25 per cent in August, Bank of America Securities said in a research note.