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RBI rate hike coming: Not a question of ‘if’ but by ‘how much’ | Mint – Mint

The central bank is likely to raise the benchmark lending rate by 25-50 basis points on Wednesday as inflation continues to remain above its comfort level, experts have said.

The RBI will also increase the inflation forecast for the current financial year to above 6% from its earlier projection of 5.7%, according to market analysts and economists.

The decision of the RBI Governor Shaktikanta Das-headed MPC, which started its deliberations on Monday, is scheduled to be announced at 10 am tomorrow.

The RBI Governor has already indicated that there may be another hike in the repo rate though he refrained from quantifying it.

Last month, the central bank had raised the repo rate or short term lending rate by 40 basis points in an off-cycle monetary policy review to check spiralling inflation.

It was the first increase in the policy repo rate in nearly two years. The repo rate is the interest rate at which the central bank lends short-term funds to banks.

‘RBI will have to front-load rate hikes’

According to a Bloomberg survey, the monetary policy makers will probably raise the benchmark interest rate by 50 basis points to 4.9%.

The poll predictions, following last month’s surprise 40 basis-point off-cycle hike, narrowed the action to size of increase to check inflation that’s been running above the central bank’s 2%-6% target band since the beginning of 2022.

Kaushik Das, chief India economist at Deutsche Bank AG, said, “Given the elevated inflation trajectory, RBI will have to front-load rate hikes.” A decisive action at this juncture will go a long way toward containing inflation, Das said.

What to watch for in RBI Governor’s speech:

Inflation outlook

Analysts will be keenly watching for the RBI’s take on the inflation trajectory, especially after Prime Minister Narendra Modi’s government announced fiscal steps in tandem with monetary efforts to tame prices.

Economists at Barclays Plc and Citigroup Inc see the central bank raising its average inflation forecast for the year ending March to above 6% from 5.7% seen previously.

The Centre’s $26 billion fiscal package aimed at easing price pressures by lowering some levies on retail fuels to imports may not provide any immediate reprieve to the inflation-targeting RBI, said Rahul Bajoria, an economist at Barclays.

While inflation worries may keep the RBI focused on prices, near term growth impulses remain largely stable, as per Nomura Holdings economists Sonal Varma and Aurodeep Nandi. They do not expect a “material downgrade” of growth forecasts in the policy.

Terminal rate

The forecasts would also act as an indication of how much rates can rise in the current cycle, with some analysts seeing borrowing costs rising above pre-pandemic levels.

The RBI Governor’s reluctance in a recent interview to commit to the pre-pandemic rate of 5.15% may be an indication of the MPC’s resolve to raise the main repurchase rate beyond that over the next few meetings, Ananth Narayan, senior India analyst at Observatory Group, has said.

Experts view

Indranil Pan, Chief Economist at Yes Bank, said the inflation surprise has brought to the fore the need for RBI to tighten the monetary policy.

“We see RBI extending its 40 bps repo hike of May with a 35 bps increase in June, followed by 25 bps each in August and September. By this time, we expect the global growth to have softened enough to pull down commodity prices and thus provide some comfort to the domestic inflation cycle too,” he added.

Suvodeep Rakshit, Senior Economist at Kotak Institutional Equities, said, “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.”

Saransh Trehan, Managing Director of Trehan Group, opined that the central bank is likely to increase the key policy rates by up to 50 basis points.

Banks will eventually pass it on to borrowers. However, given the prevailing historical low interest rates, it will not make significant impact on the demand, he added.

“We expect the policy rate to go up by 35-50 bps. RBI is, however, likely to continuously provide liquidity support through the LAF window to sustain the growth process. It would provide support to the government borrowing programme while controlling the hardening of yield through policy twists,” credit rating agency Infomerics said.

Anand Nevatia, Fund Manager at Trust Mutual Fund, said with the central bank now prioritising inflation targeting over growth, “we expect 35-50 bps rate hike along with hike in CRR to bring down liquidity”.

With agency inputs

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