Will RBI go for another repo rate hike 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 could go for a hike in benchmark interest rates again to contain inflation that continues to remain above its upper tolerance level.

RBI Governor Shaktikanta Das had earlier already indicated that there may be another hike in the repo rate, though he refrained from quantifying it.

There are speculations that the central bank may go for at least 35 basis points (bps) hike over and above the 40 bps hike effected last month after an off-cycle MPC meeting -- first hike after August 2018. In the same off-cycle meeting, the cash reserve ratio was hiked by 50 basis points to 4.5 per cent essentially to squeeze out some liquidity from the system.

India is currently facing the heat of 'imported inflation' owing to rising crude prices, supply chain disruption and global liquidity absorption. The ongoing Russia-Ukraine war has further pushed up commodity prices across the globe.

Although the government played its role to tame inflation by reducing petrol and diesel prices, bringing in restrictions for exports in order to keep the domestic market stable etc, market experts are estimating a bigger hike in interest rate as consumer price index (CPI) based retail inflation galloped for a seventh straight month to touch an 8-year high of 7.79 per cent in April. The wholesale price-based inflation has remained in double digits for 13 months and touched a record high of 15.08 per cent in April.

35-50 bps hike likely

On expectations from the MPC Shanti Ekambaram, Group President, Consumer Banking, Kotak Mahindra Bank, said the MPC has signalled a gradual withdrawal of accommodation in light of higher inflation.

"I expect a rate hike between 35-50 basis points in the June policy. Based on inflation data and external factors, including oil and commodity prices, expect a total of 100 to 150 bps increase in repo rate from the current 4.4 per cent," she said.

Ravi Singhal, Vice Chairman, GCL Securities Limited, said that after the government reduced excise on petroleum products, import duty on steel and some procedures in wheat, edible oil and sugar, "the street appears divided". He, however, added that an interest rate hike of .25 per cent to .75 per cent is possible in the upcoming cycle.

Anand Nevatia, fund manager, Trust Mutual Fund, said that RBI is now prioritising inflation over growth and "we expect 35-50bps rate hike along with hike in CRR to bring down liquidity".

"We should be prepared for a series of rate hikes as the central bank aims to reach neutral to positive real rates," Anand said.

"RBI’s latest move to increase the repo rate will be beneficial for lifestyle retail industries as well as other retail categories in India. Inflation has picked up in the recent month, which has been further aggravated due to the ongoing geopolitical tensions. This can affect the overall household spending and retail baskets. There is a need to make concentrated efforts to clamp down on inflation, as this will help the retail sector alongside the overall economy," Ridhima Kansal, Director, Rosemoore, said.

Suren Goel, Partner, RPS Group, said that to curb inflation, the regulatory bodies are required to control liquidity circulation in the economy. "For a few months, the inflation rate has been above 6%, which is beyond the RBI’s safe zone. Although the hike will make borrowing costlier, an unstable economy is not conducive to the overall health of the real estate industry. For the industry to operate optimally, it is important that the economy continues to grow in a stable, inclusive and steady fashion."

The government has tasked the Reserve Bank to ensure consumer price index based inflation remains at 4 per cent with margin of two per cent on the either side.