BS policy poll: RBI may push rates up by 30-50 bps, say economists

MPC may front-load rate hikes to tame inflation, say economists

The Reserve Bank of India’s Monetary Policy Comm­ittee (MPC) is likely to announce a repo rate hike of 35-50 basis points (bps) in its policy statement on August 5 in a bid to tackle elevated inflation, according to a majority of respondents in a Business Standard poll.

Of the 10 institutions polled, three expected the MPC to straightaway raise the benchmark policy rate by 50 bps; three others predicted an incr­ease of 35 bps. Two institutions gave an estimate of a 35-50-bp hike, while one provided a range of 40-50 bps for policy tightening. One institution said the MPC could opt for a 25-35 bp incr­ease. The median of the poll sho­wed a rate increase of 43 basis points.

The rate-setting panel commenced its current monetary policy tightening cycle on May 4, and has raised the repo rate by total 90 basis points to 4.90 per cent since then. A rate hike of 25 bps would take the repo rate back to 5.15 per cent —the level that prevailed before the nat­ional lockdown was imposed to cu­rb the spread of Covid-19 in March 2020.

Given that the Consumer Price Index inflation — the RBI’s monetary policy anchor — remains well above the central bank’s target band of 2-6 per cent, a fresh rate hike on August 5 is being considered a certainty by economists and market participants.

The latest data showed that headline retail inflation was at 7.01 per cent in June, marking the sixth consecuti­ve month when the price gauge was above the RBI’s mandated zone. The central bank’s medium-term target for CPI inflation is 4 per cent. Upside risks to India’s inflation increased dr­am­atically after Russia’s invasion of Ukraine in late February as the conflict led to a sharp increase in global commodity prices, including that of crude oil. Given that India imports more than 80 per cent of its fuel ne­eds, the hardening of crude oil prices exerts considerable pressure on both country’s inflation and trade deficit.

While crude oil prices have cooled down sharply over the past couple of months — Brent crude oil futures were last near the $104 per barrel-mark against a 14-year high of $140 per barrel in March — economists expect the RBI to announce rate hikes in quick succession in order to rein in the inflationary impulses.

“While inflation could come down below 7 per cent in the next few prints, the RBI is likely to continue with its front-loading of interest rate hikes as inflationary risks still remain. The terminal rate in this policy cycle is likely to be close to 5.75-6 per cent,” said HDFC Bank’s Principal Econ­omist Sakshi Gupta. 

Gupta predicted a rate hike of 35-50 bps in the upcoming policy statement.

Members of the MPC and RBI officials have recently spoken about the need for front-loading rate hikes in the current cycle. This is happening at a time when the Federal Reserve is aggressively raising interest rates to rein in 40-year high inflation in the US.

So far in 2022, the US central bank has raised interest rates by 225 basis points. The rapid pace of the Fed’s rate hikes has led to large outflows of overseas funds from Indian equities in 2022 as global investors have preferred improved returns in the world’s largest economy.

Consequently, the rupee has weakened against the US dollar, touching a record low of 80.06 on July 19.

Some economists feel that while the inflation risks in the US are much higher than those prevailing in India, the Fed’s rate hikes exert pressure on the RBI to raise rates at home and make returns on domestic debt instruments attractive.

While the RBI is not seen following the Fed’s path when it comes to the magnitude of rate hikes, economists expect the central bank to decisively signal a shift towards tighter financial conditions by not only raising the repo rate but also changing its liquidity stance.

“In our base case, we now see the RBI MPC hiking policy repo rate by 35 bps, taking it to 5.25 per cent (higher than pre-pandemic level), with a stance change to calibrated tightening from withdrawal of accommodation,” economists from Bank of America Securities wrote.

“Alternatively, the MPC could choose to hike by a more aggressive 50 bps -- the same as June, joining some developed markets and regional central banks in sending a more decisive signal,” they wrote.

Most economists expect the RBI to retain its real GDP growth forecast of 7.2 per cent for the current fiscal year. The CPI inflation forecast of 6.7 per cent for the current fiscal year is also likely to be retained, economists said.