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RBI Policy Review LIVE Updates: RBI set to hike policy rates for the third time in a row to tame inflation

RBI Policy Review LIVE Updates: The Reserve Bank of India is likely to hike the policy repo rate by 25 to 50 basis points on Friday, the third hike since the beginning of the current financial year, in order to tame the inflationary pressure.

Sixteen of 36 economists surveyed by Bloomberg see the Reserve Bank of India’s six-member monetary policy committee lifting the repurchase rate by half-point to 5.40%, a level last seen in August 2019. Fourteen of them predict a 35-basis point hike, five a quarter-point action and one for a 40 basis-point increase — with any of these moves seen enough to return borrowing cost to late 2019 levels.

With Federal Reserve officials signaling a pause is out of the question until they see evidence of inflation easing, RBI watchers will be closely monitoring Governor Shaktikanta Das’s remarks for any guidance on the pace and length of the monetary tightening cycle as he seeks to ensure a “soft landing” for the economy. The central bank has increased the key rate by 90 basis points since May, including a half-point hike in June.

Following the trend, the Bank of England announced its biggest interest rate increase in 27 years on Thursday as it forecasted that the war in Ukraine would fuel further inflation and tip the UK economy into a prolonged recession.

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‘Rates closer to to 5.25%’

According to HDFC Bank’s Chief Economist Abheek Barua, the RBI is “likely to take rates above a level deemed ‘neutral’ (which we think is closer to 5.25 per cent) before slowing down or looking at becoming more data dependent in this rate hike cycle.”

FM Sitharaman on economy and inflation

Earlier, Finance Minister Nirmala Sitharaman assured that the Indian economy, compared to the situation prevailing in many of the other peer groups and in many of the developed economies, is definitely much better. On inflation, Sitharaman said the government and the central bank has taken enough steps to keep inflation at 7% or ideally below 6%. The RBI is mandated to target inflation in a band of 2-6%.

A look at India’s wholesale inflation

India’s wholesale inflation eased from a three-decade high in June, amid some softening in prices of global commodities including crude and edible oils that are key imports for the nation. Wholesale prices rose 15.18% in June from a year earlier, data released by the Commerce Ministry showed.

Impact of the RBI decision on the stock markets

Srikanth Subramanian, CEO-Designate, Kotak Cherry, said, “Equity markets seem to have discounted a 35-50 bps rise and hence a corresponding rate hike may not result in a big shock especially on the back of good earnings and economic momentum.”

Fed likely to hike rates next month

Federal Reserve officials voiced their determination to rein in high inflation, although one noted a half-percentage-point hike in the U.S. central bank’s key interest rate next month might be enough to march toward that goal. “I start from the idea that 50 (basis points) would be a reasonable thing to do in September because I believe I’m seeing evidence in my contact conversations, and in the observations of the world I see, that there are some bright spots for me,” San Francisco Fed President Mary Daly said in an interview with Reuters.

Bank of England launches biggest interest rate hike in 27 years

The Bank of England announced its biggest interest rate increase in 27 years on Thursday as it forecast that the war in Ukraine would fuel further inflation and tip the UK economy into a prolonged recession. Soaring natural gas prices are likely to drive consumer price inflation to 13.3% in October, from 9.4% in June, the bank said.

‘MPC to hike benchmark repo rate by 50 bps’

“We expect RBI MPC to hike benchmark repo rate by 50 bps 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,” said 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 policymakers is how 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,” Iyer said.

Markets look for ample liquidity

The markets will also seek assurances from the RBI that there’s ample liquidity and that the central bank is ready to implement measures to address any tightness.

Raghuram Rajan on rupee worries

The central bank should keep its focus on prices and not worry about rupee’s weakness which is at a “pretty level,” Raghuram Rajan, former governor of the RBI, said in an interview on Bloomberg on Wednesday. “If you focus on getting inflation under control, the exchange rate finds the appropriate level.”

The rupee ride

While the rupee has hit a series of lows in recent months, dropping past 80 to a dollar in July, it has pulled back amid signs of returning foreign fund inflows. Dovish signals from the monetary authority may not sit well with the currency traders.

The pace and length of the monetary tightening cycle

With Federal Reserve officials signaling a pause is out of the question until they see evidence of inflation easing, RBI watchers will be closely monitoring Governor Shaktikanta Das’s remarks for any guidance on the pace and length of the monetary tightening cycle as he seeks to ensure a “soft landing” for the economy. The central bank has increased the key rate by 90 basis points since May, including a half-point hike in June.

RBI’s inflation fight

While inflation has stayed above the RBI’s target ceiling of 6% since the beginning of the year, falling commodity prices may provide some scope for the central bank to suggest that pressures are easing.

RBI's inflation fight

A change in stance?

The Indian central bank-led rate-setting panel is most likely to raise the policy rate and perhaps change the “accommodative” stance as well today.

Second increase in the policy repo rate

In its second bi-monthly policy review in June, the RBI hiked the policy repo rate by 50 basis points to 4.90 per cent.

First increase in the policy repo rate

In its off-cycle monetary policy review in May, the RBI hiked the policy repo rate by 40 basis points or 0.40 per cent. This was the first increase in the policy repo rate in nearly two years. The repo rate is the interest rate at which the RBI lends short-term funds to banks.

Third hike in a row

If the RBI chooses to hike the policy repo rate today, it will be the third hike in a row. The RBI started tightening the monetary policy at the beginning of the current financial year.

Extent of the rate hike

While the hike in policy interest rates is almost certain, analysts and economists have different opinions on the extent of the rate hike. It varies between 25 basis points to 50 basis points.

RBI Policy Review today

The second bi-monthly meeting of the RBI Monetary Policy Committee started on Wednesday. RBI Governor Shaktikanta Das is scheduled to announce the Monetary Policy Committee decisions today.

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