Experts believe RBI to hike repo rate by 25-50 basis points

Mumbai (Maharashtra) [India], June 8 : Amid rising inflation concerns in the economy, all eyes are on today's Monetary Policy Meeting outcome as experts believe that the Reserve Bank of India (RBI) is likely to increase the repo rate by 25 to 50 basis points (BPS).
RBI will announce the credit policy at 10 am today.
Last month, the central bank 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.
India's largest bank, State Bank of India (SBI) in its research report has said that might keep the following challenges in mind while deciding its policy. Uncertainty around the evolution of the pandemic continues to prevail. The emergence of monkeypox adds further to a layer of uncertainty. Geopolitical tension to increase in coming months as high crude prices impacts growth.
By 2022 so far, more than 45 central banks across AEs and EMEs have raised policy interest rates and/or scaled back liquidity, with many central banks hiking interest rates in back-to-back policies. SBI's view is that RBI may increase the repo rate by 50 bps and keep its stance accommodative.
Indranil Pan, Chief Economist, YES BANK said that recently released GDP data showed a sliding y-o-y growth for private consumption expenditure, an indication that economic activity remains slow. On the other hand, the inflation surprise has brought to the fore the need for the RBI to tighten monetary policy.
"The government has also joined the RBI in an attempt to contain inflationary pressures in the economy. We see the RBI extending its 40bps repo hike of May with a 35bps increase in June, followed by 25bps each in August and September," the Chief Economist told ANI.
"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. We thus factor in the RBI to press the pause button again after a 15bps insurance hike in the repo rate in December and analyze the implications of its rate hike cycle of 140 bps on growth before taking any further decision," Pas stated.
Meanwhile, HDFC Bank Treasury Research Desk says that the RBI is expected to raise the policy rate by 25 bps while continuing to keep its stance and the CRR rate unchanged.
"We tilt on the side of a 25 bps rate hike instead of 50 bps as we do not see a compelling case for a larger rate hike at this stage. For one, the central bank could take comfort from the recent measures announced by the government to combat inflation. Moreover, the expectation of a normal monsoon and some recent moderation in global food prices also provide some comfort for the food inflation outlook," the HDFC Bank said.
Finally, after delivering a 40 bps rate hike in May, the central bank could err on the side of caution and avoid any major disruptions in the financial market (especially in regard to the bond market where keeping borrowing costs at bay remains a key objective) and to grow, which remains uneven and has shown signs of a fragile recovery at best, it added.
It further says that they do not expect any change in the current monetary policy stance despite the increase in rates.
"From what we understand, the accommodative while focusing on withdrawal of accommodation" stance is perhaps in line with the central bank's move towards pre-pandemic levels of interest rates (repo rate at 5.15 per cent) - so a reset in rates instead of a sharper tightening. If our reading is correct, the stance could remain unchanged until the pre-pandemic level of interest rate (or thereabouts) is achieved," the HDFC Bank Treasury Research Desk added.
It also believes that RBI will change its inflation forecast by 70-80bps from 5.7 per cent earlier citing the change in global and domestic price pressures. Although the growth forecast is expected to be kept unchanged at 7.2 per cent for FY23.