The Reserve Bank's (RBI) three-day huddle to decide on monetary policy is underway while concerns over soaring inflation and slowing economy amid evolving geopolitical situation are keeping the market jittery.
Reserve Bank Governor Shaktikanta Das headed the six-member Monetary Policy Committee (MPC) is scheduled to announce the policy resolution on Wednesday, June 8.
A rate hike is almost certain; only the magnitude of the rate hike is to be seen. Most analysts and brokerage firms expect the RBI to lift rates in the range of 25-50 bps in June as inflationary pressure is very high and the RBI would not want to fall behind the curve.
Bank of America (BofA) Securities expects the RBI MPC to hike the policy repo rate by 40 bps in June and 35 bps in August.
Upasna Bhardwaj, Chief Economist at Kotak Mahindra Bank observed that from the policy withdrawal perspective, RBI in the last two months has moved quite aggressively and swiftly.
"The weighted average overnight rates have risen by 80-90bps since the April MPC policy. The recent countercyclical government measures have clearly provided room for the MPC to avoid disruptive tightening. We expect a repo rate hike of 35-40bps and status quo on CRR in the upcoming June policy,” said Bhardwaj.
Mohit Batra, Founder & CEO of MarketsMojo pointed out RBI will try to tackle two issues in its upcoming monetary policy- tackle inflation and ensure that the rupee does not depreciate too much against the dollar.
"The last time when RBI revised its inflation target, crude was at $100 per barrel, and now it's trading at $120 per barrel, suggesting a risk of inflation flaring up is high. Keeping these facts like rupee depreciation and high inflation rate, I expect RBI to hike the interest rate by 50bps," said Batra.
Will a 50 bps rate hike trigger a sharp selloff?
It is unlikely that the market will witness a fresh bearish phase in the market when the rates are raised as a rate hike is mostly expected lines.
Market participants believe that even the commentary on growth and inflation may not be in focus because several agencies have already expressed their views on what growth and inflation trajectory may be like in the short to medium term.
Some analysts believe the MPC may revise upward the inflation trajectory by 70-80bps accounting for the upside price pressures while the GDP estimates may remain unchanged for now.
However, an immediate reaction cannot be ruled out and the market may see a 1-2 percent fall in the market.
"A marginal fall of 1-2 percent can occur in the market because of an immediate reaction but a prolonged correction is unlikely," said G. Chokkalingam, Founder & Head of Research, Equinomics Research & Advisory, who expects a 50 bps rate hike in June.
V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services said RBI's rate hike is a foregone conclusion; the only unknown is the quantum of the rate hike.
"Even if the rate hike is by a steep 50bp, the market is unlikely to be impacted much since frontloading of the rate hike will be more effective in anchoring inflation expectations," said Vijayakumar.
"The market direction is likely to be influenced more by the inflation in the US, which, in turn, will decide how far the Fed will go in raising rates. This will be the key determinant of possible 'risk on' or 'risk off' in equity markets globally. A rising rate scenario will improve the margin of the banking sector since deposit rates lag lending rates. The most attractively valued segment in the market now is financials, particularly banking," Vijayakumar added.
Disclaimer: The views and recommendations made above are those of individual analysts and not of MintGenie.