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RBI's MPC Meeting From Aug 3; Here's What Experts Say

While some experts believe that the RBI will raise the repo rate by up to 50 basis points, others think that the quantum of increase will range from 25 to 35 basis points

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The Reserve Bank of India (RBI) to hold its Monetary Policy Committee (MPC) meeting for the financial year 2022-23 this week on August 3-5, 2022. With ECB and US Fed’s rate hike, the central bank is also likely to rise its key policy rate by up to 50 basis points.

Here's what experts say.

Upasna Bhardwaj, Chief Economist, Kotak Mahindra Bank

We expect RBI to hike repo rate by 50bps in the upcoming policy. While some of the early signs of inflation moderation is visible we believe that the external sector risks remain abound and to offset, at the margin, the increasing pressure on INR, RBI should frontload the rate hikes even as the overall terminal rate may not eventually be very high. We continue to expect 85bps hike in Repo rate to 5.75 per cent by end 2022.

Lakshmi Iyer, Chief Investment Officer (Debt) & Head Products, Kotak Mahindra Asset Management Company

From to hike or not earlier this year, the key question for policy makers ishow much to hike! US Fed seems to be running a Sprint as far as rate hikes are concerned. Most Other economies may not have the luxury of a marathon race hence. We expect RBI MPC to hike benchmark repo rate by 50bps as CPI continues to rule above RBIs threshold band. Commentary maybe neutral / dovish as CPI trend seems to be following RBIs forecast for FY 2023. Key to watch also would be the guidance if any in the future course of rate moves.

Suvodeep Rakshit, Senior Economist at Kotak Institutional Equities

We believe that the RBI will hike repo rate by 50 bps to acknowledge (1) elevated but gradually falling inflation, (2) being in sync with global monetary policy while reacting to domestic macro situation, (3) addressing external sector pressures by managing interest rate differentials, and (4) continuing to frontload the rate hikes. Arguably, the quantum of hike is finely balanced within the 35-50 bps range. We continue to pencil in repo rate at 5.75 per cent by end-FY2023. The RBI’s deliberations will likely be centered around (1) global monetary policy cycle and outlook for global growth, (2) external sector imbalances manifesting in pressures on the Rs, (3) recent easing of global commodity prices, and (4) domestic inflation and growth trajectory. We note that since the June policy, the Fed has surprised on the upside with 150 bps hikes over the June and July policies with risks of narrowing interest rate differentials. We believe that while domestic inflation concerns may be slightly lower, external sector concerns warrant caution.

Madan Sabnavis, Chief Economist, Bank of Baroda

We do expect the RBI to go for a 25 bps hike in repo rate this time. This will bring it to the pre-covid level of 5.15 per cent. A 25 bps hike will indicate that inflation has peaked and though high will not go up significantly. Any aggressive move of say 50 bps will indicate that inflation peak has not yet been achieved and hence that can send a different signal to the market. We also expect some mention on steps to be taken to stabilise liquidity as surpluses have come down. VRR and OMOs could be the two prongs used by the RBI to induce liquidity in the coming months.

Under the present situation of global prices coming down, we do not expect any change in forecasts of either inflation or GDP.

Arun Malhotra, Founding Partner & Portfolio Manager at CapGrow Capital Advisors

The pressure on commodities prices is easing with lot of metals and other commodities falling by 15-30 per cent. This should ease the inflationary pressure going forward. The twin objective of the RBI of maintaining price stability and at the same time not hurting growth would be best achieved by raising rates by 25 bps.

Sharad Chandra Shukla, Director of Mehta Equities

The Reserve Bank has already raised the key policy rate by 90 basis points in May and June to 4.9 per cent to tame high inflation, mainly due to supply disruptions on account of the ongoing Russia-Ukraine war. But with internation crude prices easing, RBI's actions will be more moderate than the rest of the world, as inflation is expected to fall below 6 per cent. We expect at least another 50 bps hike in the repo rate hike, if not 75 bps in the August policy and by another 100 bps in the next six months in case the current economic situation does not improve.

Defending the rupee is only reducing the war chest of Central bank. The USD-Re rate is almost at Re 0.80. and expect INR to touch Rs 85 in next 12 months. Till the time FII flows turn positive, the depreciation of currency will continue. Current account deficit is also getting revised estimates to 3-3.5 per cent is the expected range and if global inflation does not ease the MPC will have to take real tough stance of hiking rates by 100bps in next 6 months. Of course, the reversal. The reversal is possible if Big Ticket PSU sale of Equity shares is not initiated. Can collect few billion USD’s thru this strategy. But obviously it requires political WILL.

Vinay Pai, Equirus

Current liquidity scenario has well surpassed pre-pandemic levels and is similar to the levels witnessed in Aug-sept 2019 when repo rate was 5.4 per cent. In that sense “withdrawal of accommodation” from liquidity perspective is perhaps done. To complete the same from a policy angle, we expect a 50 bp hike but a dovish to neutral commentary indicating that that RBI need not be as aggressive as the Fed. RBI could take comfort in the fact that the domestic inflation trajectory will fall in-line by end of the year. While front-loaded hike is necessary to drive inflation decline and mitigate any demand side shocks, currency management may also necessitate the same.

Alongside we would expect RBI to soften the growth trajectory (from 7.2 per cent), reiterate inflation estimates with some mention during the call that the direction of inflation is more critical to watch than the absolute number. The comments of this scale could be construed as neutral to dovish, toning down the pace of further hikes.we expect a 50 bp hike but a dovish to neutral commentary indicating that that RBI need not be as aggressive as the Fed, taking comfort that domestic inflation trajectory will come within 6 per cent by end of the fiscal.

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