The members of the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) are currently deliberating the magnitude of the rate hike to be announced on September 30.
The expectations are that the MPC will decide to go for a 50 bps hike as inflation remains uncomfortably high. The central bank also has the challenge to ensure there is no deficit of liquidity in the system. So, RBI may also announce an OMO (open market operations) purchase calendar.
The market might have discounted a 50bps rate hike. Unless there is a negative surprise on the rate hike front, it is unlikely to have any major impact on the market. The key things in focus will be the commentary on growth and inflation.
We have collated a list of what top analysts think about the upcoming MPC outcome. Take a look.
Analyst: Lakshmi Iyer, Chief Investment Officer (Debt) & Head Products, Kotak Mahindra Asset Management Company
The US fed seems to be on a roll with the pace and quantum of rate hikes. The US dollar has been steamrolling both emerging markets and developed markets currencies alike. Hence, despite no major adverse data points in India, RBI MPC May be tempted to deliver a 50 bps rate hike in the upcoming policy.
“Tone and texture of the guidance could be key for the markets. We could also see some small downward tweaks to GDP growth forecasts with CPI forecasts likely to remain unchanged,” said Iyer.
Analyst: Suvodeep Rakshit, Senior economist at Kotak Institutional Equities
Inflation prints over the coming months are expected to remain elevated albeit moderating gradually to below MPC’s upper threshold of 6% in Q4FY23.
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 the first half of the calendar year 2023 (H1CY23).
“We maintain our FY2023E CPI inflation estimate at 6.5%. We retain our view that the MPC will continue with calibrated repo rate hikes towards 6% 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,” said Rakshit.
Analyst: Srikanth Subramanian, CEO, Kotak Cherry
The RBI’s Monetary Policy Committee (MPC) will take guidance from high inflation in India and uneven data points from global economies. They may also take into account that banking system liquidity in India has gone negative compared to 2019.
With retail inflation above RBI’s comfort range, there is that the RBI will increase rates by 25 basis points. However, it is very possible that the RBI might decide this is a good time to be ahead of the curve and increase rates by 50 basis points.
Analyst: Pankaj Pathak, Fund Manager-Fixed Income, Quantum AMC
With falling commodity prices, domestic inflation concerns have eased somewhat. But the external environment is turning extremely hostile with sharply rising dollars and volatile financial markets.
“We expect, the RBI will maintain a hawkish tone with particular focus on the external risks. It may hike the policy rate by 35-50 basis points in this meeting while keeping the room open for further hikes if global rates continue to move higher or inflation does not soften,” said Pathak.
“Bond market is already pricing for up to 50 basis points rate hike. From the market perspective, RBI’s guidance on liquidity management will be more important in this meeting. As the liquidity condition is turning into a deficit, the market is expecting OMO purchases to add liquidity and support the bond market in the second half. Given the tightening policy direction, the RBI may disappoint the market on OMOs,” Pathak said.
Analyst: Madhavi Arora, Lead – Economist, Emkay Global Financial Services
The fast-evolving world order and consistent repricing of the Fed’s outsized hikes are strong-arming the emerging markets (EMs). This exposes the instability inherent in the classic EM central bank trilemma: one cannot have a stable currency, unfettered capital flows, and independent monetary policy all at the same time.
This painful adjustment has not spared the RBI either, which is set to deliver another front-loaded 50bps hike this week. The net cost of supposed soft signalling via a shallow hike could be higher than a larger hike.
The hike would also make the ex-post real repo rate positive, but it would be still lower than RBI’s estimated real neutral rate.
Liquidity tightness would lead to faster and better transmission, implying that the RBI may not get too restrictive and the terminal rate could hover near the estimated real rates, i.e., not more than 100bps hikes ahead.
However, the situation globally is still fluid, and macro assessments might require frequent adjustments ahead from a policy perspective.
Analyst: Sonal Badhan, Economist, Bank of Baroda
“We expect MPC to raise the repo rate by another 50bps. We expect rates to increase up to 6-6.25%. We maintain our growth and inflation forecasts. However, significant risks to both have emerged. While risks to growth are driven by a slowdown in global growth, risks to inflation are more domestic in nature,” said Badhan.
Deficient/untimely rains are estimated to have impacted the output of rice and pulses. While the government has announced a rice export ban, the final impact on inflation is yet to be seen.
Other key developments which will be considered by the RBI will include volatility in the currency and bonds market. To comfort the yields and address the issue of temporary liquidity deficit, RBI may also announce an OMO purchase calendar.
Analyst: Divam Sharma, smallcase manager & Co founder, Green Portfolio
The monetary policy will continue to diverge for the RBI. Inflation prints in the US and EU are running at 400% above their target, whereas in India the divergence is only 16% above our upper band.
RBI will give relatively more priority to upholding economic growth instead of solely focusing on the price levels because the RBI can afford to. “We expect a 40-50bps increase in the policy rates in the September meeting,” said Sharma.
Analyst: Raghvendra Nath, Managing Director – Ladderup Wealth Management Private Limited
The upcoming RBI MPC meet is expected to offer significant cues to the financial ecosystem in India.
“In keeping with the 75-bps rate hike by the US Federal Reserve earlier this month, and the rising inflation, which is expected to be around 7% for September as well, we are preparing for a rate hike by the MPC,” said Nath.
The dollar’s continued strength, as well as the geopolitical concerns in Europe, will weigh on the MPC while they make this decision, and it is likely that the market will have to contend with a 50-bps hike.
“However, we remain bullish on the economy as macro factors are aligned to propel it higher and believe that India should be able to absorb the upcoming hike, barring any major disruptions over the short-term,” said Nath.
Disclaimer: The views and recommendations given in this article are those of individual analysts and broking firms. These do not represent the views of MintGenie.