At a time when the central banks globally opting for monetary policy tightening to control inflation, the Reserve Bank of India’s Monetary Policy Committee (MPC) is set to meet this week to decide on the interest rates in the country. Though there is a consensus that the RBI will increase the key repo rate, but experts differ on the quantum. An analyst poll conducted by news18.com suggests that the RBI might hike the repo rate in the range of 25-50 basis points (bps) this week, with most experts forecasting a 25-35 bps hike.
The MPC decides to hike the repo rate, which is called monetary tightening, when it needs to control the inflation in the country. The RBI is mandated by rules to contain inflation within 2-6 per cent.
Currently, the retail inflation, which the central bank takes as the reference for its policy review, stands at 7.01 per cent. Though the CPI inflation in June at 7.01 per cent is slightly lower than 7.04 per cent in May, it is still above the RBI’s tolerance limit.
“As the commodity prices have come off from their recent peaks lately, it will have some cooling impact on inflation but the weakness in rupee may wipe out some these gains," India Ratings Principal Economist Sunil Kumar Sinha said. He added that the base effect will also turn unfavourable from July 2022.
India Ratings expects July 2022 inflation to be 20-30 bps higher than June 2022 inflation. It expects the RBI to pursue monetary tightening and hike the policy rate by 25-35 bps in the August 2022 monetary policy review.
The domestic currency has declined about 8 per cent against the US dollar this calendar year so far. This is due to the continuous outflow of foreign investments, surging crude oil prices, tight monetary policy by US Federal Reserve, and general dollar strength. It recently touched its lowest mark of 80 against the dollar, before recovering to 79.05 per dollar on Monday (August 1).
The three-day meeting of the six-member MPC is scheduled to take place during August 3-5, and the policy decision will be announced on the last day of the meeting (August 5).
Vivek Iyer, partner and leader (financial services risk) of Grant Thornton Bharat, said, “We expect a 25-bp hike on the interest rates given that the global supply chain bottleneck and its corresponding impact on inflation continues. Additionally, currency volatility continues to be a reality and, hence, a rate hike appears to be on the cards."
Bank of Baroda Chief Economist Madan Sabnavis expects a 25 bps hike in the repo rate. He said the standing deposit facility (SDF), reverse repo and cash reserve ratio (CRR) are expected to remain the same.
Brokerage firm Kotak Institutional Securities’ Suvodeep Rakshit expects a 50-basis-point hike in the repo rate; digital loan distributor ApnaPaisa’s V Swaminathan sees it to rise 35 bps; and fintech company BASIC Home Loan’s Atul Monga says it might rise 25-35 bps.
Investment management and advisory firm CapGrow Capital’s Arun Malhotra forecasts a 25 bp increase; and brokerage firm TradeSmart’s Vijay Singhania says the policy rate is likely to increase 30-50 bps.
In the last monetary policy review in June, the RBI’s MPC had hiked the repo rate by 50 basis points to 4.9 per cent. It was the second hike within a month after an off-cycle monetary policy hike of 40 basis points in May.
Currently, the repo rate stands at 4.90 per cent, SDF at 5.65 per cent, marginal standing facility at 5.15 per cent, bank rate at 5.15 per cent and the reverse repo rate at 3.35 per cent.
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