By How Much Interest Rates May Increase? Know What Economists Say

Even as the Reserve Bank of India’s (RBI) Monetary Policy Committee is set to meet next week, RBI Governor Shaktikanta Das has said the expectation of a rate hike is a no-brainer given the high level of inflation prevailing in the country. Though he did not give an idea of how much the rate-setting panel may raise interest rates, experts say the key repo rate may increase by 25-50 basis points (bps).

The six-member Monetary Policy Committee (MPC) is going to meet during June 6-8 to decide on the interest rates in the country. The policy decision will be announced on the last day of the meeting, June 8.

Crisil Chief Economist D K Joshi expects the repo rate to go up by 50 basis points in the upcoming MPC policy review, while Bank of Baroda Chief Economist Madan Sabnavis told news18.com that the MPC may decide to increase the rate by 25-35 basis points.

Suvodeep Rakshit, senior economist at Kotak Institutional Equities, said: “We expect the RBI to hike repo rate by 40 bps in the June policy meeting. However, we should be open for a rate hike in the range of 35-50 bps hinging on how the MPC wants to reach the pre-pandemic repo rate of 5.15 per cent or around that mark by the end of the August policy.”

Repo rate (the rate at which the RBI lends money to commercial banks) is one of the external benchmarks mandated by the RBI, on the basis of which commercial banks decide the rate of interest for various loans.

He added that the central bank is likely to hike the cash reserve ratio (CRR) in one of the upcoming policies but will be contingent on how it sees the durable liquidity panning out in the next few months. CRR is the percentage of cash that banks need to keep in reserves vis-à-vis their total deposits.

“We expect another 50 bps of CRR hike by the end of FY2023. Along with the repo rate hike, the RBI will also revise its inflation estimates higher, possibly indicating inflation remaining close to 7 per cent for the most part of CY2022. We expect the RBI to continue focusing on taking inflation and signaling its intent to continue raising rate and normalising liquidity, while not entirely losing its on growth given the uneven nature of growth recovery,” Rakshit said.

The retail inflation in April stood at an eight-year high of 7.79 per cent, forcing the RBI to hike interest rates in an off-cycle monetary policy in May. In the April MPC meet, the RBI had revised upwards its retail inflation forecast to 5.7 per cent for the current financial year 2022-23, as compared with the 4.5 per cent projected earlier.

Vinod Nair, head (research) at Geojit Financial Services: “The late sell-off indicates the lack of confidence in the domestic market driven by the concerns over Central Bank policy. While in the global market, the investors were waiting for the release of US job data. The RBI is expected to hike rates by 25-35 bps and the US Fed by 50 bps.”

India Ratings and Research (Ind-Ra) expects the retail inflation to average at a nine-year high of 6.9 per cent in FY23, and the RBI to increase the policy rate at least by 75 bps in the rest of FY23.

“The hike could also be 100-125 bps but this will depend on incoming data, policy actions by global central banks, global geopolitical situation and its spillover effect on the India economy. The first rate increase by the RBI could be of the order of 50 bps in the June 2022 policy and another 25 bps in the October 2022 policy,” the rating agency said.

It also said that along with it, the cash reserve ratio could also be hiked by 50 bps to 5 per cent by end-FY23.

In a recent interview with CNBC-TV18, RBI Governor Shaktikanta Das said, “The expectation of a rate hike is a no-brainer. There will be some increase in repo rates but by how much, I will not be able to tell now.”

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