According to an ET poll conducted among 20 banks, fund managers and financial institutions, the RBI Monetary Policy Committee (MPC) will likely assess the risk of spillover inflation and a sliding rupee, which could hurt growth of the world’s fifth-largest economy. While a majority of the economists surveyed predict a 50-basis point (bps) increase, the forecast ranges from 35 to 60 bps.
The MPC will announce its bi-monthly policy on September 30. Repo rate, the rate at which banks borrow short-term funds, is now 5.40% after three hikes that began in May. The central bank has increased the benchmark gauge by 140 bps, or 1.4 percentage point, this fiscal.
“This policy review is poised at a delicate juncture as the central bank will have to balance domestic inflation growth dynamics amid the increasing hawkish tone of major global central banks,” said Aditi Nayar, chief economist, Icra Ratings.
“At the same time, RBI is likely to address liquidity issues, with a sudden drying up of liquidity due to frictional factors before the busy season has even started,” said Nayar of Icra.
Last week, cash in the banking system slipped to a deficit mode for the first time over three years, prompting RBI to infuse Rs 50,000 crore via its variable rate repo window.
A majority of poll participants increased their rate hike estimates by at least 15 basis points to half a percentage point now, after a hawkish US Federal Reserve policy last week and local August inflation that fired up to 7% again.
Two large banks from Mumbai expect a 60-bps rate hike as it will take the repo to 6%, a rounded-off figure helping in fiscal arithmetic.
“RBI is likely to focus on rising risks from aggressive tightening by systemically important global central banks. That could lead to sharper rate hikes,” said Dharmakirti Joshi, chief economist at Crisil Ratings.
An expected 50-basis point rate hike, coupled with a stance change to “neutral” from “accommodative”, according to Joshi, “will also help in partly muting the spillover effects of US Fed actions on capital flows and currency.”
The rupee hit a new lifetime low of 81.24 to the dollar on Friday, amid fear of capital outflows. The narrowing yield differential between developed and emerging economies is likely to prompt foreign portfolio investors to seek the safety of dollar-backed assets.
A weakening currency accentuates concerns over widening current account deficit – excess of imports over exports – as the value of foreign liabilities goes up.
“The key challenge for the MPC will be how to calibrate repo rate so it does not compromise growth and, at the same time, tames inflation,” said Madan Sabnavis, chief economist at Bank of Baroda.
RBI projects India’s real GDP to grow 7.2% in the ongoing fiscal. In the first quarter ended June 30, the economy grew 13.5%, missing its estimate of 16.2%. The central bank forecasts inflation at 6.7% for the fiscal year, assuming normal monsoon rains and crude oil price at an average of $105 a barrel.
Last week, the Asian Development Bank cut India’s GDP growth forecast for FY23 to 7% from the previous 7.2%, citing sluggish global demand and tightening monetary policy.
A day after the US Fed increased its policy rate on Wednesday by 75 basis points, the Bank of England announced a second consecutive half-point interest rate hike.
“It will likely become imperative for RBI to front-load rate hikes in this monetary policy tightening cycle,” Goldman Sachs Economic Research said in a report on Friday.
This month, the UK Treasury benchmark yield spiked 95 bps while US Treasury yielded 57 basis points higher. India’s sovereign debt barometer, meanwhile, rose 20 bps to 7.39%, diminishing the lure for yield-hungry investors.