The US Federal Reserve has raised interest rates by 75 basis points in line with expectations, the second hike in a month after a similar hike last month. The hike has further raised the interest rate differential between India and the US, which means that the returns in the US have further increased as compared with India. However, experts here believe that the rate hike by the US Fed is unlikely to impact the RBI’s monetary policy decisions next week.
The RBI’s Monetary Policy Committee is scheduled to meet next week (August 3-5) to decide on the interest rates in the country. Inflation in June stood at 7.01 per cent, which is slightly lower than 7.04 per cent in May but beyond the RBI’s tolerance limit of 2-6 per cent. So, experts said the RBI is expected to go for another rate hike in the upcoming monetary policy review.
Suvodeep Rakshit, senior economist at Kotak Institutional Equities, said, “With no surprises from the US Fed, we expect the RBI to remain on track to hike repo rate by 35 bps (basis points) while maintaining a hawkish stance. While the Fed’s moves have been feeding into the rupee weakness against the dollar, the RBI has been using its forex reserves to address the resultant volatility.”
Rakshit added that the Reserve Bank of India (RBI) will remain focused on clamping down domestic inflation in the August policy.
“We believe that a 35 bps hike with a hawkish guidance will be appropriate to acknowledge: Elevated but falling inflation trajectory; being in line with global monetary policy while reacting to domestic macro situation; and reverting gradually to usual rate hikes while remaining hawkish. Arguably, the choice is finely balanced between a 35 bps hike and a 50 bps hike in the August policy,” he said.
The Monetary Policy Committee in its last policy review in June hiked the key repo rate by 50 bps, which was the second hike within almost a month after it raised 40 bps in off-cycle policy review in May.
Aditi Gupta, economist at Bank of Baroda, said, “While the US Federal Reserve has raised by 225 bps in the calendar year 2022, the RBI has raised the repo rate by 90 bps. The aggressive rate hikes by Fed are feeding expectations that the RBI may also front-load its rate hikes. However, conditions in India do not warrant an aggressive stance by the RBI.”
This is because, she added, domestic inflationary pressures have shown signs of stabilisation. Retail inflation in India surged to 7.3 per cent in the Q1FY23 and is likely to remain elevated in Q2FY23, led by the base effect. Further, risks to the inflation outlook have subsided. Global commodity prices, including oil, have moderated from their peaks.”
“Further, after depreciating sharply in June and July 2022, the rupee is showing signs of stabilisation which also bodes well for the inflation outlook. Overall, in the absence of any fresh shocks, India’s inflation trajectory is likely to evolve in line with RBI’s projections. Hence, we expect that the RBI may hike rates by only 25 bps in August 2022, followed by another 25 bps rate hikes in the next two meetings,” Gupta said.
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