RBI expected to raise interest rates by 25-50 basis points today: experts

The Reserve Bank of India (RBI) is expected to raise its key rate by 25 to 50 basis points on Wednesday as inflation continues to remain above its comfort level, experts said.

Last month, RBI raised the repo rate or short-term lending rate by 40 basis points as part of an off-cycle monetary policy review to control spiraling inflation.

The decision by the Monetary Policy Committee (MPC) headed by RBI Governor Shaktikanta Das, which started its deliberations on Monday, is expected to be announced at 10 a.m. on Wednesday.

Das has already indicated that there could be another hike in the repo rate although he refrained from quantifying it.

Inflation based on the Consumer Price Index (CPI), which RBI takes into account when formulating its monetary policy, has been on the rise since October 2021.

Retail price inflation has remained above RBI’s upper tolerance level of 6% since January. It had hit an 8-year high of 7.79% in April, topping the RBI’s tolerance band for inflation of 2% to 6% for a fourth consecutive month. Inflation is expected to remain high in the near future.

The government has instructed the central bank to ensure that retail price inflation remains at 4% with a 2% margin on either side.

A report from HDFC Bank’s Treasury Research Office said RBI is expected to raise the policy rate by 25 basis points while continuing to hold its position and the CRR rate unchanged.

“We’re leaning towards a 25 basis point rate hike instead of 50 basis points because we don’t see a compelling case for a larger rate hike at this point,” he said.

He expects RBI to change the inflation forecast by 70 to 80 basis points from 5.7% earlier, citing changing global and domestic price pressures.

Indranil Pan, chief economist at Yes Bank, said the inflation surprise highlighted the need for the RBI to tighten monetary policy.

“We see RBI extending its 40bps repo hike from May with a 35bps increase in June, followed by 25bps each in August and September. world will have slowed down enough to drive down commodity prices and thus also provide some comfort to the domestic inflation cycle,” he said.

Saransh Trehan, managing director of the Trehan Group, estimated that RBI is likely to raise policy rates by up to 50 basis points.

The banks will eventually pass it on to the borrowers. However, given historically low interest rates, this will not have a significant impact on demand, he said.

“We expect the policy rate to increase by 35 to 50 basis points. RBI is however likely to provide ongoing liquidity support through the LAF window to support the growth process. government borrowing while controlling yield tightening through policy twists,” credit rating agency Infomerics said.

Analysts also expect the RBI to reduce liquidity, step up its fight against inflation and expand its efforts to bring monetary conditions back to where they were before the pandemic prompted sweeping action to boost the economy.

“We see the RBI continuing with measures to absorb liquidity,” BofA Global Research said in a June 3 note, predicting a 50 basis point increase in the cash reserve ratio (CRR) for banks, which would absorb around Rs 87,000 crore. in the banking system.

Anand Nevatia, fund manager at Trust Mutual Fund, said that with RBI now prioritizing inflation targeting over growth, “we expect rates to rise by 35 to 50 basis points as well as a hike of the CRR to reduce liquidity”.

The government has instructed RBI to ensure that CPI-based inflation remains at 4% with a 2% margin on either side.

Last month, MPC raised the key repo rate by 40 basis points to 4.4% to rein in rising inflation. It was the first rate hike after August 2018.

In a bid to cushion the impact of the lockdown, RBI had cut the repo rate by 75 basis points to 4.40% on March 27, 2020 from 5.15%.

On May 22, 2020, RBI again cut the repo rate by 40 basis points and lowered it to 4%. Thereafter, it maintained the status quo of the reference interest rate for almost two years before increasing it on May 4, 2022.

“A rise at the RBI policy meeting this week…is a foregone conclusion,” said Radhika Rao, senior economist at DBS Bank.

“Inflation has been consistently high over the past three years, even as the drivers have changed – from supply bottlenecks to staples and reopening pressures,” she added. .

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