RBI likely to opt for a rate hike in June; Know what analysts expect

Even as retail price inflation hovers at an eight-year high of 7.79%, remaining above the Reserve Bank of India’s (RBI) target limit for the fourth consecutive month in April, the Monetary Policy Committee (MPC) is now expected to continue its rate hikes going forward. In an off-cycle monetary policy review, the MPC recently raised the key repo rate by 40 basis points (bps) to control inflation.

Inflation based on the consumer price index (CPI), which the RBI takes as its benchmark when deciding monetary policy, in April 2022 hit an eight-year high of 7.79 percent. It should be compared to 4.23% in April 2021 and 6.97% in March 2022.

Rural inflation in April stood at a 12-year high of 8.4%, while inflation in urban areas was at an 18-month high of 7.1% in April 2022. Inflation underlying index, which excludes changes in food and oil prices, in April also hit a 95-month high of 6.97%.

The Reserve Bank of India has a mandate to keep retail inflation within the 2-6% range.

Ratings agency Icra said in its report that commodity price pressures stemming from supply disruptions amid global headwinds will keep underlying inflation elevated in the coming months, although ‘there has been some sequential moderation in key commodity prices (steel, copper, aluminum, etc.) amid China demand concerns. Overall, we find that a higher base is softening May 2022 CPI inflation, although it will remain above 6.5%.

He added: “We now expect a high probability that the MPC will increase the repo rate by 40 basis points and 35 basis points, respectively, over the next two policies (scheduled in June and August 2022) to 5.15. %, followed by a pause to assess the impact of growth.”

He added that from now on, he sees the terminal repo rate in the current rate hike cycle at 5.5% by the middle of 2023. One basis point is equal to 100th of a percentage point. .

Sunil Kumar Sinha, Senior Economist at India Ratings and Research, said the RBI raised the repo rate by 40 bps and the CRR by 50 bps in May 2022. bps and CRR by 50 bps over the course of the year. ‘EX23. However, Ind-Ra believes that future rate hikes will depend on the data.”

DSP Mutual Fund in its note said that the RBI had already increased its off-cycle policy by 40 basis points. “This could provide an additional 25 basis points in June 2022 policy. Repo rates will most likely reach pre-COVID-19 levels of 5.15%, after which the pace of increases may slow. »

Stating that the escalation of CPI inflation to 7.79% in April 2022 is fueled by high energy and food prices, namely the uncertainty caused by the geopolitical conflict, the President of PHDCCI Pradeep Multani said, “We look forward to government-calibrated policy measures to address supply constraints.”

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