To control high inflation in the country, the RBI’s Monetary Policy Committee (MPC) has raised the repo rate in its latest policy review. Raising concerns over the rising inflation, RBI Governor Shaktikanta Das on Wednesday said it is likely to remain above the upper tolerance band of 6 per cent in the first three quarters of 2022-23. Experts now believe that the MPC will go for more hikes in the upcoming months and the repo rate is likely to be at 5.75 per cent by the end of the current financial year.
The MPC has decided to hike the key repo rate by 50 basis points to 4.90 per cent. It also decided to remain focused on the withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth.
Barclays Chief Economist (India) Rahul Bajoria said, “Based on (Wednesday’s) moves, if the inflation outlook does not improve and downside growth risks do not rise materially, we think the RBI will continue on its rate-hiking trajectory, taking the policy rate to 5.25 percent by delivering a 35 bps hike in the next meeting in August.”
He added that in the next three meetings (August, October and December), the RBI is expected to make inflation management its key priority, which could include steps to curb aggregate demand.
“In terms of sequencing, we now expect the RBI to deliver a 35 bps rate hike in August, and then raise the policy rate by 25 bps to 5.50 percent in October, while also switching to a neutral stance. Beyond that, we expect RBI to deliver one more rate hike in December to 5.75 per cent, which we now believe will mark the end of this cycle,” Bajoria said.
The RBI has also revised upwards by 100 basis points its retail inflation forecast to 6.7 per cent for the current financial year 2022-23, compared with the 5.7 per cent projected earlier. The retail inflation in April stood at an eight-year high of 7.79 per cent. However, the central bank has the mandate to keep it within 2-6 per cent.
Rajni Thakur, chief economist at RBL Bank, said, “We now expect a further rate hike of 50 bps in August, taking the repo rate higher than pre-COVID-19 levels, followed by a pause to re-access the macro-dynamics and hikes in smaller quantum thereafter pushing year-end repo-rate close to 6 per cent levels.
Sunil Kumar Sinha, principal economist at India Ratings and Research, said that with the Russia-Ukraine conflict dragging on, the likelihood of elevated global commodity prices cooling off and supply-side disruptions coming to an end does not appear to be a possibility in the near term.
“Given the RBI’s inflation projection of 7.5 per cent in 1QFY23, 7.4 per cent in 2QFY23, 6.2 per cent in 3QFY23 and 5.8 per cent in 4QFY23, Ind-Ra believes there is still a possibility of another 25-50 bps hike in the policy rate in FY23 and the repo rate hike in this cycle could go up to 6 per cent,” Sinha added.
Amar Ambani, head (institutional equities) at YES Securities, said that on the policy rate outlook, the pronounced priority to combat inflation has paved the path for further rate hikes, with the repo rate seen proximal to 5.75 per cent by the end of FY23.
Stating that the June policy was a continuation of the off-cycle policy with the focus remaining squarely on inflation, Kotak Institutional Equities Senior Economist Suvodeep Rakshit said the RBI’s decision of hiking the repo rate by 50 bps as well as increasing inflation estimate by 100 bps were in line with market expectations.
“The tone of the policy continues to be hawkish and we expect the RBI to continue hiking repo rate to ensure a neutral to marginally positive real policy rate. We expect 35 bps repo rate hike in the August policy to 5.25 per cent and the repo rate at 5.75 per cent by the end of FY2023… We also expect another 50 bps hike in CRR (cash reserve ratio) to 5 per cent by end-FY2023 to move the liquidity conditions towards the pre-pandemic levels,” Rakshit added.
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