The Reserve Bank of India's (RBI) six-member Monetary Policy Committee (MPC) on Wednesday began its three-day meeting on the next bi-monthly monetary policy amid expectations of at least a 35 basis point (bps) hike in the interest rate to curb inflation. As the inflation pressure continues to hurt economic growth, it is widely expected the central bank, headed by RBI Governor Shaktikanta Das, will raise the key lending rate for the third consecutive time on August 5. However, recent supply side measures taken by the government to mitigate inflationary pressures suggest the rate hike may not be as steep. So far, the RBI has raised the repo rate by a cumulative 90 bps – 40 bps in an off-cycle meeting in May and 50 bps in June.

According to foreign brokerage firm BofA Securities, the central bank will announce a 35 bps hike in the key repo rate at its meeting on August 5. The agency expects MPC to retain its FY23 Consumer Price Inflation (CPI) and real GDP growth forecasts, at 6.7% and 7.2%, respectively.

"In our base case, we now see the RBI MPC hike policy repo rate by 0.35%, taking it to 5.25% (higher than pre-pandemic level), with stance change to calibrated tightening from the withdrawal of accommodation," the brokerage said in a report.

In the last policy meeting in June, RBI Governor Shaktikanta Das-led MPC hiked the repo rate by 50 basis points to 4.9% in order to contain spiralling inflation. The MPC decided to remain focused on the withdrawal of the "accommodative" policy stance to support the economy battered by Covid and the crisis that emerged due to the Russia-Ukraine war.

Here’s what market experts expect from the MPC meeting:

Sachchidanand Shukla, chief economist, Mahindra & Mahindra, expects the RBI to stay alive to the challenges posed by the aggressive tightening by the U.S. Federal Reserve and other advanced central banks, and at the same time remains cognizant of the differences between the West and India in terms of growth-inflation mix and the underlying causes and remedies. “We expect the RBI to raise rates by 40 bps to signal rapid normalisation in view of huge global uncertainty. It is unlikely that they will change the GDP number and will retain FY23 growth at 7.2%. But there is a small chance that inflation number may be calibrated further given that actual inflation has undershot RBI’s forecast," he said.

Last week, the US Federal Reserve hiked interest rates by 75 bps for the second straight month as inflation remained elevated due to the ongoing Russia-Ukraine war which led to the surge in international crude prices and other commodities. With this, the cumulative rate increase in the last two months stood at 150 bps, which is the highest since the early 1980s. Central banks in Australia, the United Kingdom, Europe, and Canada have also raised their rates to combat rising costs.

Ravi Subramanian, MD & CEO, Shriram Housing Finance, said the MPC may hike rates by 35bps, however, he doesn’t anticipate a jumbo-sized hike like other major central banks namely U.S. Fed or European Central Bank.

According to him, the economic conditions in India have marginally improved in absence of any major shock and therefore an aggressive rate path is not warranted. “In fact, any supersized hike in repo rate will go against the palpable recovery in productive sectors like housing and construction which have the highest forward and backward linkages in the economy. The inflation trajectory is above the RBI’s comfort level of 4% (+/-2%). Therefore, the MPC will opt for interest rate increases in smaller doses till the general price level falls within the RBI’s comfort band,” he said.

“Such guidance will temper the future rate hike concerns and soothe the nerves of the market. Also, I expect MPC to shift its policy stance from 'calibrated tightening’ to `neutral’ in its forthcoming resolution,” Subramanian added.

Shivam Bajaj, founder & CEO at Avener Capital, said, “Two critical factors would determine MPC's stand on rates in this meeting, whether Inflation continues to remain beyond RBI's comfort zone and GST collections as well as PMI is looking up even after successive rates hikes by RBI in the initial part of this year which would give it confidence to continue its hawkish stand. This might align market expectations towards rate hike by around 30 bps."

Amit Jain, BTG Legal partner, said that repo rate hike may pinch MNCs and startups with an increased tax bill as well. “Increase in repo rates could encourage Indian subsidiaries of the MNCs and start-ups to channelize their borrowings from overseas group companies. The interest payment on such borrowings could lead to increase in tax costs and hit the bottom line of these entities. Thin capitalisation rules introduced in 2017 limit the tax deductibility of interest paid to overseas group companies and indirectly lead to higher taxes. Refreshing the deductibility thresholds for interest expense of MNCs is the need of the hour,” he said.

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