Mon. Dec 5th, 2022

The Reserve Bank of India begins its bi-monthly monetary policy committee meeting from Wednesday. The MPC meeting comes against a backdrop of high inflation, which remains at multi-year highs in many markets, and tighter monetary policies globally.

The US Federal Reserve raised its overnight benchmark interest rate by 75 basis points (0.75 percent) last week. Cumulatively, it raised the interest rate by 225 bps in 2022 and Fed officials signaled there could be more hikes in the coming months as controlling inflation remains center stage.

Rising interest rates in major economies have affected RBI movements this year. But there have been other domestic concerns, such as the depreciation of the rupee and retail inflation continuing to remain above its target band, prompting it to raise its benchmark repo rate by 90 basis points during May and June to 4, 90 percent.

In recent weeks, there have been some comforting factors, commodity prices that were on the rise in early 2022 have cooled off a bit. The rupee, which had hit a record low of 80.06 per US dollar on July 21, recovered to close at 78.71 on Tuesday. The currency has been one of the best performers among emerging markets in July. Retail inflation in June eased slightly to 7.01 percent, but it has been six months since it has remained above the RBI’s 2-6 percent tolerance band.

While India is not yet facing a recession threat like the US, economic growth is still expected to be slower than previous forecasts. The International Monetary Fund recently lowered India’s GDP growth projection for 2022-23 to 7.4 percent from 8.2 percent. Other multilateral institutions such as the World Bank have also lowered their GDP growth forecasts for India in recent weeks.

Against this background, another rate hike is widely expected to be announced on Friday, when the RBI announces key MPC decisions. The question is largely how much will rates go up.

“The US Federal Reserve appears to be running full throttle when it comes to rate hikes. Most other economies may not have the luxury of a marathon race, therefore. We expect RBI MPC to raise the benchmark repo rate by 50 bps as CPI inflation continues to rule above the RBI threshold band. Comments may be neutral/dovish as the CPI trend appears to follow the FY2023 RBI forecast,” said Lakshmi Iyer, chief investment officer (debt) at Kotak Mahindra Asset Management Co.

Mohit Ralhan, Global CEO and Managing Partner of TIW Capital, says the RBI is likely to make a “significant rate hike” amid a challenging fight against inflation due to the ongoing conflict between Russia and Ukraine that has kept high rates agricultural commodity prices and supply-side problems. continue due to China’s zero-COVID policy.

Instead of raising rates sharply in one fell swoop, however, the Reserve Bank may seek to spread it out, he believes.

“A rise from 0.35% to 0.50% seems likely to be followed by another similar rise later this year, if inflation continues above 7%,” Ralhan said.

Read More: RBI may hike repo rate by 35-50 bps in upcoming MPC meet