RBI MPC Likely To Go For 50-bps Repo Rate Hike Next Month, Say Experts

Even as retail inflation has seen an uptick in August after a downward trend for three months, experts feel that the RBI’s Monetary Policy Committee might go for another rate hike by up to 50 basis points. The central bank has also said its top priority right now is to tackle inflation in the country.

The retail inflation in the country rose to 7 per cent in August, compared with 6.71 per cent in July. It comes after three months of India’s retail inflation easing from its peak, following the Reserve Bank’s three consecutive repo rate hikes since May. The Consumer Price Index (CPI) inflation has remained above the RBI’s upper tolerance limit of 6 per cent for the eighth straight month, and has risen despite the central bank’s efforts to curb it.

Food inflation, which is responsible for nearly half the CPI basket, quickened to 7.62 per cent in August this year, against 6.69 per cent in July. The prices of cereals, pulses, vegetables, milk, pulses and other items saw a rise in August, as compared to July.

Suvodeep Rakshit, senior economist at Kotak Institutional Equities, said, “Inflation prints over the coming months are expected to remain elevated albeit moderating gradually to below MPC’s upper threshold of 6 per cent in 4QFY23.”

Rakshit said the moderation will mainly be aided by moderating commodity prices, especially crude oil; government intervention and surplus reservoir levels to cap food price surge; and easing global supply-chain pressures.

“With the MPC expected to continue with rate hikes, the lagged impact of monetary tightening will help curb inflation expectations. Accordingly, we expect the average CPI inflation trajectory to be lower than the RBI’s estimates by around 60 bps in 1HCY23. We maintain our FY2023E CPI inflation estimate at 6.5 per cent. We retain our view that the MPC will continue with calibrated repo rate hikes towards 6 per cent by end-CY2022 with 35 bps hike in the September policy along with the shift in the operating target from SDF to repo rate by end-FY2023,” he added.

Nomura in its note also said that sticky inflation and weakening growth increase the policy dilemma but it expects inflation to remain a top priority for now, given policy rates are still below neutral. It expects a 35-bp hike in September and 25 bps in December for a 6 per cent terminal rate. “At the margin, the August CPI data suggest that the September MPC decision may lie between a 35 bps and a 50 bps hike, rather than a 25 bps hike.”

Sunil Kumar Sinha, principal economist at India Ratings and Research, said in its note, “August 2022 is the 35th consecutive month in which retail inflation has been higher than RBI’s inflation target of 4 per cent. This is the second instance since RBI adopted the inflation targeting approach that the retail inflation has breached the upper tolerance limit of 6 per cent for eight consecutive months — January 2022 to August 2022. The earlier instance was from April 2020 to November 2020.”

It added that Ind-Ra believes that in line with the major central banks across the world, the RBI will continue to follow a tighter monetary policy regime and another 25-50 bps hike in policy rates is expected in FY23. “However, the timing of these hikes will be data dependent.”

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