Global Economy

RBI could raise repo rate by up to 50 bps


The Reserve Bank of India is likely to lift its key policy rate by up to 50 basis points this week, a majority of market experts in ET’s poll of 22 participants said, as Europe’s unexpected move to raise the cost of funds for the first time in a decade underscores the stickiness of a global price spiral that prompted the second outsized increase in US benchmark rates in as many months. One basis point is 0.01%.

More than half the respondents that included bankers, traders, analysts and fund managers also expect RBI to change its stance to ‘neutral’ from ‘accommodative.’ To be sure, Mint Street is already focused on withdrawal of monetary accommodation.

The poll showed that the Monetary Policy Committee (MPC) of RBI would choose to rather be in lockstep with the global central banks for the moment to prevent a precipitate decline in the rupee, seeking to mitigate the risks of exaggerated fund outflows and imported inflation even as domestic prices lately showed signs of easing.

“Inflation may have peaked but that won’t catch the RBI off-guard, particularly when the global central banks are on a rate-hiking spree,” said A Balasubramaniam, CEO, Aditya Birla Sunlife Mutual Fund.

Policy Announcement on Friday

“It is, however, to be seen how the central bank assesses the risk of inflation now while keeping the door open for supporting growth,” he said.

The bi-monthly policy will be announced on Friday.

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About three-fourths of the poll respondents believe the RBI will raise the repo rate by up to 50 basis points. The rest believe the quantum of increase will range from 25 to 35 basis points. The key repo rate, at which high-street lenders borrow short-term funds from the banker of last resort, is currently at 4.90% – still below the pre-pandemic level.

Consumer prices in India rose to an eight-year high at 7.80% in April. The gauge slid to 7.01% in June. Central bank governor Shaktikanta Das also said earlier that “inflation appears to have peaked,” although he simultaneously underscored the risk of high volatility.

Restraining Inflation

“The August policy could reemphasize the primacy of inflation targeting amid the continued volatility in the global forex markets,” said Vivek Kumar, economist at QuantEco Research.

The Indian rupee hit a lifetime low of 80.06 against the US dollar on July 21 amid sustained fund outflows. It has since erased some of its losses that stand in the vicinity of 7% since the start of the year.

Global crude oil prices, a key contributor to domestic inflation, slipped below $100 a barrel about two weeks ago. It is now above $108 a barrel as expectations of additional supplies remained unfulfilled ahead of this week’s crucial meeting of major oil producing countries.

“Global economic fundamentals are changing rapidly and, therefore, data dependency is appropriate for all central banks, including the RBI,” said Aditi Nayar, chief economist,

Ratings. “Having said that, given how peculiar the situation is, there is merit in articulating the stance to clarify the broad direction of rates and liquidity going ahead.”

The European Central Bank moved away from its policy guidance by raising the cost of funds by half a percentage point in the common market zone, having assessed data sets that suggested the current bout of inflation merited the rare increase in policy rates to ensure an easing in prices. Federal Reserve Chair Jerome Powell also appears to be in favour of aggressive rate increases to tame the quickest pace of inflation in more than four decades in the US, which slipped technically into a recession in the June quarter after broad economic output data pointed to the second absolute shrinkage in a row.

Surplus liquidity in the Indian financial system narrowed to Rs 76,034 crore last Thursday, compared with Rs 8.12 lakh crore at the beginning of the financial year on April 4. This caused overnight interbank call rates to rise 60 basis points higher than the repo rate last Tuesday.

“We expect some measures from the RBI on easing access to credit ahead of the festival season, which should also contribute to growth,” said Rajni Thakur, chief economist,

.

To be sure, the International Monetary Fund (IMF) last week slashed India’s FY23 growth outlook to 7.4%, from 8.2% forecast in April. It cited less favourable external conditions and rapid policy tightening for the downward revision.



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