RBI may raise repo rate by 25-50 basis points at monetary policy meeting next week

The Reserve Bank of India (RBI) rate-setting committee is expected to raise the repo rate by 25-50 basis points at the monetary policy meeting to be held from August 3-5, according to estimates from various currency managers. funds and economists.

Economists and fund managers have mixed views on policy direction. Few expect the stance to change to “neutral,” while some say “the pullback from the dovish stance may persist.”

“We expect a 40 to 50 basis point hike in the repo rate at the policy review in August. The withdrawal of the dovish stance may persist,” said Vivek Kumar, an economist at QuantEco Research.

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In the last two policies, the central bank raised the rate by a cumulative 90 basis points in May and June, due to high inflation, which exceeded the RBI’s upper tolerance band for consecutive months.

“25-35 basis points of repo rate hike. Stance could shift to neutral. Guidance could be a bit more comforting than previous policy given some correction in commodity prices and crude oil prices range-related,” said Mahendra Jajoo, CIO, Fixed Income at Mirae Asset Investment Managers.

On the inflation front, Upasna Bhardwaj, Chief Economist at Kotak Mahindra Bank, said risks to domestic inflation remain on the upside in the event of continued pass-through from high input prices, pass-through from higher crude oil prices on domestic prices at the pump and higher food prices due to weak monsoon or lower acreage.

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She also added that geopolitical tensions and their implications for energy prices will remain an inflation risk. Along with inflation, the RBI will also take into account imbalances in the external sector. The trade deficit may remain large in the event of a steeper drop in exports due to slowing global demand while imports remain sticky.

While, Pankaj Pathak, fund manager at Quantum Mutual Fund, expects the RBI’s comment to soften a bit in acknowledgment that inflation risks are receding.

The growth forecast is expected to remain unchanged due to lower growth globally. “There shouldn’t be much change in the outlook for growth or inflation. Growth can be expected to slow with global growth and inflation is a guess,” said Sandeep Bagla, CEO of Trust Mutual Fund.

Participants expect that after the central bank’s rate hike, government bond yields will rise another 15 to 20 basis points from the current level. But, bond levels will also follow the movement of crude oil prices and US Treasury yields.

The long end of the curve assesses the pause or reversal in rates, while the shorter end of the curve assesses aggressive rate hikes leading to a flattening of the curve. In such a scenario, markets are likely to be volatile and react to every move.

“However, bond markets have largely priced in the rate hike, therefore, they should be constrained in the policy going forward unless there is an element of surprise in the policy announcement,” he said. added Jajoo.

Meanwhile, on the rupiah front, experts believe that RBI will intervene in the market to avoid excessive volatility, but will not target any particular level.

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