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RBI MPC Meet: What Do Experts Believe?
RBI's monetary policy meet will be held from September 28-30. The experts say that the central bank will once again hike the repo rate
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The meeting of the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) is going to start next week from September 28, whose decision will come out on September 30. Experts believe that this time too, the RBI can increase the repo rate for the fourth time in a row.
As per various media reports, RBI can increase interest rates to control inflation. Economists believe that this time the cental bank can hike rates by up to 35 basis points. At the same time, some market experts say that 50 basis points can be increased.
At present, inflation in the country is at the level of 7 per cent. At the same time, the RBI has increased rates by 1.40 basis points so far. It is being believed that, if the Reserve Bank increases the interest rates even this time, then its direct impact will be seen on the development of the country.
We bring here some pre monetary policy views from the economists and industry experts:
Suvodeep Rakshit, Senior Economist, 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 per cent in 4QFY23. 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 1HCY23. We maintain our FY2023E CPI inflation estimate at 6.5 per cent. We retain our view that the MPC will continue with calibrated repo rate hikes towards 6 per cent 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.
Srikanth Subramanian, CEO, Kotak Cherry
The monetary policies in emerging markets will inevitably take cues from the US Fed. The RBI’s Monetary Policy Committee 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.
Madan Sabnavis, Chief Economist, Bank of Baroda
The MPC will have a unique issue to debate when it meets next week for the monetary policy. The recent downhill movement of the rupee following the Fed’s announcement has made the rupee one of the more unsatisfactory currencies based on the response to the dollar strengthening in the global market. This piece will also be actively discussed in the deliberations, as when deciding on interest rates, the currency part of the story cannot be left out.
Inflation remains high at around 7 per cent and is unlikely to come down any time soon. This means that a rate hike is given. The quantum is what the market would be interested in. While a hike of 25-35 bps would have signaled that the RBI is confident that the worst of inflation is over, the recent developments in the forex market could prompt a higher quantum of 50 bps to stay on track with other markets so as to retain investor interest.
The RBI’s take on both inflation and GDP growth will be important. We do not believe there will be any change in the headline numbers. GDP growth in Q1 was lower than RBI expectations, but given certain anomalies in the data there would be some revisions that will help to retain their targeted level of 7.2 per cent. Presently with no new shock expected on the prices front the inflation forecast will remain unchanged. Stable global commodity prices especially oil provides a lot of comfort for the central bank.
This time we may expect some announcements on liquidity since after a long time it has moved into a deficit. This is exerting pressure on short term yields and sort of inverting the curve. A calendar on OMO is what could be expected along with variable repo auctions. As we expect stance to change to neutral, reintroduction of GSAPs may be skipped to avoid sending contrary signals.
Virat Diwanji, Group President and Head, Consumer Bank, Kotak Mahindra Bank
The upcoming monetary policy of the RBI is going to be closely watched. With strong headwinds, both globally and within India, the RBI needs to strike a balance between a global economy heading into recession, domestic economy battling inflationary pressures, depreciating rupee and tighter short term liquidity. Given the fact that Central Banks around the world have raised their benchmark rates, RBI is likely to front load its policy actions with interest rate hikes to contain inflation without hurting medium term growth prospects. There is no doubt on whether the benchmark repo rate would raise or not, the debate is how much- 35 to 50 basis points hike in the upcoming policy and what would be the peak level at the end of the fiscal before we see some flattening and/or tapering of interest rates.
Raghvendra Nath, Managing Director, Ladderup Wealth Management
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 per cent for September as well, we are preparing for a rate hike by the MPC. 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.
Churchil Bhatt, Executive VP Debt Investments, Kotak Mahindra Life Insurance Company
It is time for the bond market to take one for the rupee. The fact that the MPC may hike policy rates by 50 bps instead of 35 bps is not necessarily a game changer for bond markets. In fact, it is a small price to pay for managing currency volatility.
Sonal Badhan, Economist, Bank of Baroda
In the upcoming credit policy of RBI which is scheduled on 30 Sep 2022, we expect MPC to raise repo rate by another 50bps. We expect rates to increase up till 6-6.25 per cent. We maintain our growth and inflation forecasts. However significant risks to both have emerged. While risks to growth are driven by slowdown in global growth, risks to inflation are more domestic in nature.
Deficient/untimely rains is estimated to have impacted output of rice and pulses. While government has announced 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 OMO purchase calendar.
Mandar Pitale, Head-Treasury, SBM Bank
RBI MPC continued its focus on policy normalisation this quarter. The effective policy rate has been hiked by about 205 bp in this hiking cycle (3.35 to 5.40 per cent- a shift from reverse repo mode to repo mode) including a 140bps hike in the repo rate. The US dollar has tested 20-year highs against the other reserve currencies taking emerging market economy (EME) currencies in anuncharteredtrajectory. Dollar index indicating the strength of the US dollar against major currencies has recently tasted 114.58 for the first time since May 2002. Emerging Market Economics are facing currency depreciation, imported inflation, wider current account imbalances, capital outflows, reserve losses and financial instability in varying magnitude complicating the macroeconomic management and monetary policy actions.
In the recent past, RBI has been intervening persistently to limit rupee depreciation. As a result, foreign currency assets are depleted by about USD 100 Billion from a peak of USD 580 Billion seen on September 21. This rate of depletion is very high and hence the persistent intervention of this magnitude looks impractical as we move ahead. Also, because of the intervention of this magnitude resulting in the suction of the rupee; at present, there is no excess floating liquidity in the system. From now onwards, any further intervention by regulator to defend the rupee will take the system into liquidity deficit and this may result in spike in interest rates.
The CPI prints are expected to near 7 per cent as we move ahead with a present resurgence of food prices likely to stay in addition to impact of the delayed withdrawal of monsoon. The average monthly current account deficit during this financial year is around USD 12 billion which is significantly higher than the same number for the previous year. Therefore, to achieve a twin objective of stability of rupee and anchoring the inflation expectations, MPC is expected to opt for a maximum possible front loading of policy actions. We expect 50bps hike in REPO rate taking it to 5.90 per cent. Further, taking into consideration the upward revision in Terminal FED Fund Rate (from 4 to 4.6 per cent in CY 23), we expect terminal REPO rate of 6.5 per cent by March 2023 to achieve equilibrium in interest rate differential between US and India helping stability in currency.
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. US dollar has been steamrolling both EM and DM currencies alike. Hence despite no major adverse data points in India, RBI MPC May be tempted to deliver a 50 bps rate hike at 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.