NEW DELHI: In a bid to tame the raging inflation, the Reserve Bank of India is likely to raise interest rate by 35-50 basis points in the next monetary policy committee MPC) meeting, according to the experts.
Retail inflation in India had touched 7% in August as against 6.7% in July due to rise in food prices.
Inflation has been above RBI’s comfort level of 6% for 8 months in a row. However, experts are of the view that inflation will moderate, going forward, and the government’s focus would change to growth and job creation.
“An inflation print of 7.0% YoY (as per our expectations but higher than that of consensus) in August was greeted with a sense of déja vu. While we do expect inflation to ease next year, assuming the exogenous shocks to inflation fade, it remains a big elephant in the room,” Kunal Kundu, India Economist, Societe Generale Global Solution Centre said.
“The recent signs of an escalation in the Ukraine conflict will only serve to heighten the risks again. We expect the RBI to raise the policy rate by another 50 bps to 5.9% at its meeting on Friday, in line with its desire to front-load rate hikes. That said, the central bank may not be too far from ending its hiking cycle, with the focus then likely to shift to growth given the stubbornly high unemployment rate,” Kundu further stated. Meanwhile, Saugata Bhattacharya, VP and Chief Economist at Axis Bank, said RBI is likely to raise interest rate by 35-50 bps in next MPC meet. “MPC may change its stance to neutral since policy rates will now be approaching terminal rates for this cycle. The worst of inflation is likely to get over this year and then the moderation in rate hike will happen,” he said.
Pankaj Pathak, fund manager-fixed income at Quantum AMC, said the bond market is already pricing for up to 50 bps rate hike. 10-year government bond yields have already increased 20 bps in the last two weeks. Experts are expecting the RBI to announce open market operations and variable repo auctions in the upcoming meet, as liquidity in the banking system turned deficit from surplus after a gap of 40 months.
On September 20, the liquidity in the banking system became deficit at Rs 21,873 crore. “Liquidity in the banking system is not closely dependent upon rate hikes. It depends more upon multiple factors like RBI liquidity infusions, forex market operations, cash outgoes, credit demand etc,” said Bhattacharya.