Will RBI hike repo rate once again to beat inflation? experts speak
RBI rate hike: The Reserve Bank of India (RBI) will announce the decision of the Monetary Policy Committee (MPC) on Wednesday. There are expectations that the central bank may again hike benchmark interest rates to contain inflation that remains above its upper tolerance level.
RBI Governor Shaktikanta Das had already indicated that there could be another hike in the repo rate, though he refrained from quantifying it.
There is speculation that the central bank may go for a hike of at least 35 basis points (bps), which is higher than the 40 bps hike following an off-cycle MPC meeting last month – the first hike since August 2018. In the same off-cycle meeting, the cash reserve ratio was raised by 50 basis points to 4.5 per cent, essentially to squeeze some liquidity out of the system.
India is currently facing the heat of ‘import inflation’ due to rising crude oil prices, supply chain disruptions and global liquidity absorption. The ongoing Russo-Ukraine war has further pushed up commodity prices around the world.
While the government played its part to quell inflation by reducing the prices of petrol and diesel, banning exports to keep the domestic market stable, the market expert saw a large increase in the interest rate as consumer price index (CPI) based retail. Anticipating an increase. Inflation continued to gallop for the seventh month in a row and hit an 8-year high of 7.79 per cent in April. Wholesale price-based inflation has remained in double digits for 13 months and touched a record high of 15.08 per cent in April.
Likely to increase by 35-50 bps
On expectations from the MPC, Shanti Ekambaram, Group President, Consumer Banking, Kotak Mahindra Bank said that the MPC has indicated a gradual withdrawal of housing in the light of high inflation.
“I expect a rate hike of between 35-50 basis points in the June policy. Depending on the inflation data and external factors including oil and commodity prices, expect an overall increase of 100 to 150 bps in the repo rate from the current 4.4 per cent. is,” she said.
Ravi Singhal, vice-chairman, GCL Securities Ltd, said after the government reduced excise duty on petroleum products, import duty on steel and certain procedures in wheat, edible oil and sugar, “the road appears to be divided”. However, he added that an increase in the interest rate from .25 per cent to .75 per cent is possible in the coming cycle.
Anand Nevatia, fund manager, Trust Mutual Fund, said the RBI is now prioritizing inflation over growth and “we expect a hike in CRR by 35-50 bps to offset the liquidity crunch.”
“We should be prepared for a series of rate hikes as the central bank aims to move from neutral to positive real rates,” Anand said.
“RBI’s latest move to raise the repo rate will be beneficial for the lifestyle retail industries as well as other retail categories in India. Inflation has picked up in the recent month, further aggravated by the ongoing geopolitical tensions. This could affect the overall household spending and the retail basket. Concentrated efforts are needed to curb inflation, as this will help the retail sector along with the overall economy,” said Ridhima Kansal, Director, Rosemoor.
RPS Group partner Suren Goyal said regulatory bodies need to control liquidity circulation in the economy to curb inflation. “For a few months, the inflation rate has been above 6%, which is outside the safe zone of the RBI. Although the hike will make borrowing costlier, a volatile economy is not conducive to the overall health of the real estate industry. For the economy to function optimally, it is important that the economy continues to grow in a stable, inclusive and stable manner.”
The government has tasked the Reserve Bank with the task of ensuring that CPI-based inflation remains at 4 per cent with a margin of two per cent on either side.
Read more: Government approval required for appointment of Chinese nationals as directors in Indian companies