The Reserve bank will hike interests by another 75 basis points by August 2022

Rating agency “Icra” foresees a high likelihood that the MPC will raise the repo rate by 40 bps and 35 bps, respectively, over the next two policies (scheduled in June and August 2022) to 5.15 percent, followed by a pause to assess the impact of growth.”

SBI economists and market experts believe that the central bank will hike the interest rate by another 75 basis points (bps) by August to take the repo rate to the pre-pandemic level of 5.15 percent.

Even as the Consumer Price Index (CPI)-based inflation, which the RBI takes as a reference point while deciding on the monetary policy, in April 2022 soared to an eight-year high of 7.79 percent as compared with 4.23 percent in April 2021 and 6.97 percent in March 2022; remaining above the Reserve Bank of India’s (RBI) target limit for the fourth consecutive month in April, the Monetary Policy Committee (MPC) is now expected to continue with its rate hikes going forward. In an off-cycle monetary policy review, the MPC recently hiked the key repo rate by 40 basis points (bps) to control inflation.

Rating agency “Icra” foresees a high likelihood that the MPC will raise the repo rate by 40 bps and 35 bps, respectively, over the next two policies (scheduled in June and August 2022) to 5.15 percent, followed by a pause to assess the impact of growth.” It added that as of now, it sees the terminal repo rate in the current rate hike cycle at 5.5 percent by the middle of 2023.

Note: Inflation refers to a general increase in the prices of goods and services over time. It corresponds with a decrease in the value of your money.

Economists at SBI-:

Economists at SBI are of the view that at least 59 percent of the accelerated inflation is attributable to the impact of the geopolitical conflict triggered by the Russian invasion of Ukraine. The economists in a report said they did a study of the Russian invasion’s impact on inflation, which revealed that 59 percent of the jump in prices is due to geopolitical events. Using February as the base case, the study revealed that because of the Russia-Ukraine war alone, food and beverages, fuel, light, and transport contributed 52 percent of the increase, while another 7 percent impact came from the jump in input prices for the FMCG sector.

They opined that the inflation is unlikely to correct anytime soon, adding there is a difference between rural and urban areas when it comes to price rises. The former are impacted more by higher food price pressures, while the latter is showing more impact because of the fuel price hikes.

Statistics show rural inflation in April stood at a 12-year high of 8.4 percent, while inflation in urban areas was at an 18-month high of 7.1 percent in April 2022. Core inflation, which excludes changes in food and oil prices, in April also touched a 95-month high at 6.97 percent.

Further, the report said that it also needs to check if growth could be a large casualty in case of large and persistent rate increases, even as inflation prints will continue to be of serious concern. The economists said there can also be a positive impact of the hikes. ”A higher interest rate will be also positive for the financial system as risks will get repriced,” it said.

They also advocated RBI interventions in the NDF (non-deliverable forwards) market instead of the onshore market through banks to support the rupee as this has the benefit of not impacting rupee liquidity.

Opinion of market experts-:

A) Sunil Kumar Sinha, principal economist at India Ratings and Research, said the RBI has increased the repo rate by 40 bps and CRR by 50 bps in May 2022. “India Ratings expects monetary tightening to continue and expects repo rates to increase by 60-75 bps and CRR by 50 bps in FY23. However, Ind-Ra believes the future rate hikes will be data-dependent.”

B) DSP Mutual Fund in its note said the RBI has already hiked 40 basis points in the off-cycle policy. “It could deliver another 25 bps in the June 2022 policy. Repo rates will most probably reach pre-COVID-19 levels of 5.15 percent, after which the pace of hikes could slow.”

Meanwhile, In the latest Reuters poll, over a quarter of economists, 14 of 53, expected the RBI to hike by 35 basis points to 4.75% next month, while 20 expected a larger move ranging from 40-75 basis points, including ten who forecast a 50 basis point hike.