RBI panel may go for 35-50bps hike, reversing Covid rate cuts

MUMBAI: The RBI’s monetary policy committee (MPC) may announce a rate hike of 35-50 basis points (100bps = 1 percentage point) on Friday after its meeting, according to economists. Forecasters are unanimous in their view despite RBI governor Shaktikanta Das’s recent observation that inflation has peaked. As a result, the RBI is expected to reverse this week all the rate cuts it had undertaken in the wake of the pandemic.

RBI panel may go for 35-50bps hi

Along with key policy rates, the RBI is also expected to continue to withdraw liquidity. Last week, interest rates in the money market shot up as liquidity came down due to a variety of factors, including RBI’s sale of dollars in the interbank foreign exchange market.
After the pandemic, the RBI cut the repo rate — at which it lends to banks — by 115bps from 5.15% to 4%. Since the war broke out in Ukraine, crude oil prices have stayed firmly above $100, keeping inflation at over 6%. The RBI, in two separate hikes, has taken the repo rate to 4.9%. The expectation that the RBI will retrace steps to the pre-pandemic level is why forecasters expect a 35bps hike.
Barclay’s chief economist Rahul Bajoria said in a research report that the MPC would deliver a unanimous 35bps hike in the upcoming meeting. Two 25bps increases will follow in September and December 2022.
According to a Deutsche Bank report, the RBI should try to maintain a bare minimum interest rate differential between the repo rate and US Fed funds rate, which since 2020 has been about 325bps, and hike interest rates by 50bps. “The Fed has hiked 75bps in July and is likely to hike at least another 50bps in September, though another 75bps hike is still possible. This will take the lower bound of the Fed funds rate to at least 2.75% by September. Assuming that the terminal Fed funds rate is 3.25%, then the terminal repo rate should be at least 6.5%, if the minimum spread differential of 325bps is to be maintained,” the report said.
According to a Crisil report, central banks may run the risk of aggressive tightening, given that current inflationary pressures are still a supply-side phenomenon. “The RBI revised its CPI (consumer price index) forecast for this fiscal to 6.7% from 5.7% in April. Assuming it is successful in taming the price rise, there is a case for the repo rate to settle between 6.25% and 6.75%,” it said.
Last week, Axis Bank’s chief economist Saugata Bhattacharya had said that the RBI would hike rates by 35-50bps as the CPI inflation would continue to be above the 6% mark for several months.