Mumbai: Bankers expect the Reserve Bank of India (RBI) to deliver its second rate hike, which governor Shaktikanta Das described as a “no brainer”, in the forthcoming monetary policy committee meeting that ends on June 8. Most expect the increase to be in the range of 25-50 basis points (100bps = 1 percentage point).
The central bank had hiked its repo rate — at which it lends to banks — by 40bps to 4.4% in an off-cycle meeting on May 4. “During 2022 so far, more than 45 central banks across advanced economies and emerging markets have raised policy interest rates and/or scaled back liquidity…many central banks hiked interest rates in back-to-back policies,” said State Bank of India group chief economist Soumya Kanti Ghosh in a report. It added that a 50bps rate hike is likely. However, the RBI is likely to remain accommodative in terms of liquidity.
According to Ghosh, there are a number of risks for growth and inflation. These include the geopolitical crisis, elevated oil & commodity prices, fuel price hike and rupee depreciation. Also, the US Federal Reserve has announced a sharp increase in interest rates, resetting these.
According to Ghosh, if the RBI increases the repo rate by 75bps, then there would be an interest cost of Rs 23,114 crore on retail and micro, small & medium enterprises (MSME) consumers. This is because 39.2% of the loans are linked to external benchmarks (EBRs). Most of them are linked to the repo rate. This is likely to hurt demand. He added that data shows that there is no evidence of interest rate sensitiveness of savings as deposits continued to rise when rates dropped. “All these facts make us believe that the peak repo rate in current cycle might be anchored at 5.5% to get the optimal outcome as impact of large increases of real interest rate on deposit is uncertain,” said Ghosh.
Axis Bank chief economist Saugata Bhattacharya expects the RBI to raise the repo rate to 5.75% by the end of the current financial year. He added that the central bank may front-load increases, given that inflation has been over its tolerance levels for the past four months.
While the rate hike is being termed as “inevitable”, the markets are waiting to see the RBI’s projections for inflation as well as for withdrawal of liquidity. “The yields on government bonds are much higher than what current interest rates warrant. This means that dealers are factoring in steep rate hikes going ahead,” said a dealer.
According to a report by Bank of America Securities, the RBI would hike its inflation forecast from 5.7% now to around 6.5% for FY23. “As for GDP growth estimate, we see FY23 real GDP growth at 7.4% YoY, a shade higher than RBI’s 7.2% forecast. We don’t expect the RBI MPC (monetary policy committee) to make any changes to their growth estimate,” the report said. BofA has forecast a 40bps hike in the repo rate this month, which will be followed by another 35bps hike in the next MPC meet in August. “The key thing is that RBI MPC exits ultra-accommodation by August and takes policy repo rate to the pre-pandemic level of 5.15%. Accordingly, until then, we expect the RBI MPC will retain the stance as accommodative while focusing on withdrawal of accommodation,” the report said.




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