The Reserve Bank of India begins its bimonthly monetary policy committee meeting from Wednesday. The MPC meeting comes in the backdrop of high inflation, which continues at multi-year high in many markets, and tightening monetary policies globally.
The US Federal Reserve raised its benchmark overnight interest rate by 75 basis points (0.75 per cent) last week. Cumulatively, it has raised the interest rate by 225 bps in 2022 and Fed officials have signaled that there could be more hikes in the coming months as taming inflation remains centre-stage.
Rising interest rates in major economies has weighed on RBI moves this year. But, there have been other domestic concerns like a depreciating rupee and retail inflation continuing to stay above its target band, prompting it to raise its benchmark repo rate by 90 basis points over May and June to 4.90 per cent.
In recent weeks, there have been some comforting factors, commodity prices that were sizzling at the beginning of 2022 have cooled some what. The rupee, which had touched a record low of 80.06 to the US dollar on July 21, has rebounded and closed at 78.71 on Tuesday. The currency has been one of the top performing among emerging markets in July. Retail inflation in June eased slightly to 7.01 per cent, but its been six months now that it has stayed above RBI’s tolerance band of 2 per cent to 6 per cent.
While India doesn’t face a recessionary threat like the US just yet, economic growth is still expected to be slower than earlier forecasts. The International Monetary Fund recently lowered India’s GDP growth projection for 2022-23 to 7.4 per cent from 8.2 per cent. Other multilateral institutions like World Bank have also reduced their GDP growth forecasts for India in the last few weeks.
In this backdrop, it is widely expected that another rate hike will be announced on Friday, when the RBI announces the key decisions of the MPC. The question largely is how much will the rates go up.
“US Fed seems to be running a sprint as far as rate hikes are concerned. Most other economies may not have the luxury of a marathon race hence. We expect RBI MPC to hike benchmark repo rate by 50 bps as CPI inflation continues to rule above RBIs threshold band. Commentary may be neutral / dovish as CPI trend seems to be following RBIs forecast for FY2023,” said Lakshmi Iyer, chief investment officer (debt) at Kotak Mahindra Asset Management Co.
Mohit Ralhan, the global CEO and managing partner at TIW Capital says a “significant rate hike” is likely by the RBI amid a challenging inflation fight due to the continued Russia-Ukraine conflict that has kept agri-commodity prices elevated and supply-side issues continue due to China’s zero-COVID policy.
However, instead of hiking rates sharply in one-go, the Reserve Bank may look to spread it out, he feels.
“A 0.35 per cent to 0.50 per cent hike looks likely followed by another similar hike later this year, if inflation continues to rage above 7 per cent,” said Ralhan.