The Reserve Bank of India’s (RBI) six-member Monetary Policy Committee (MPC), which began its three-day meeting on Wednesday, is set to announce its decision on the key lending rates on September 30 at 10 AM. The RBI Governor Shaktikanta Das-led panel is widely expected to raise its policy rates for a fourth consecutive time to control inflation. The market experts expect the central bank to raise the policy rate by another 50 bps to 5.9% as retail inflation or Consumer Price Index (CPI) remained elevated above the RBI’s threshold of 6% mark for the seventh consecutive month. 

In the past three MPC meetings, the RBI has raised the repo rate, the interest rate at which the central bank lends to the commercial banks, by 140 bps in total since May this year, exceeding pre-pandemic levels of 5.15%. The apex bank raised the repo rate by 40 bps in an off-cycle meeting in May, followed by 50 bps each in June and August.

Here’s what analysts expect from the MPC meeting:

Sachchidanand Shukla, Chief Economist, M&M said, “The MPC will continue to front-load its rate hikes and will likely raise the Repo rate by another 50 bps in its upcoming policy as that Fed rate is now the highest since early 2008. The U.S. Fed has also hinted that it will continue to raise rates going forward, which will further tighten global financial conditions and impart strength to the USD.” He also opined that the RBI may revise its FY23 growth forecast a tad lower from 7.2% but keep the inflation forecast unchanged.

Soumya Kanti Ghosh, Group Chief Economic Adviser, State Bank of India, said, “We expect the peak repo rate in the cycle at 6.25%. A final rate hike of 35 bps is expected in December policy.” Aggressive response to external shocks by RBI has been just appropriate to tackle the uncertainty regarding inflation persistence, Ghosh adds.

“With liquidity in a deficit mode, the RBI may carefully calibrate its statement given that government cash balances is still at record highs, Ghosh says, adding that the good thing is that with capital inflows picking up rapid pace in August and continuing in September, liquidity could get an unlikely buffer of rupee injection in lieu of dollar purchases or building up reserves,” he added.

Ashish Chaturmohta, Director and Head, Advisory Research-JM Financial Services said, “Most street participants are pencilling yet another 35-50 bps rate hike by RBI in the upcoming policy meeting. A combination of weaker Q2 GDP print, higher CPI (surprised on upside in August at 7% YoY from 6.7%) and aggressive stance of the U.S. Federal Reserve to tame inflation is likely to force RBI to continue to front-load its policy actions. Even on the Currency Front USD/INR is testing life high levels of 81.66 as USD continues to gain strength against most major currencies.”

Analysts at ICICI Securities expect the RBI to raise its policy rate by another 50 bps at its policy meeting at the end of this month, and a further 25bp on 7th Dec’22 to 6.15%. “By that point, we expect the strong kharif harvest to moderate food prices (given that the monsoon is 7% above normal this year, despite the deficient rain in some key rain-fed rice-growing states). That, and the cumulative impact of this year’s monetary tightening, should help bring headline CPI inflation back below 6% YoY in Nov’22 and beyond.”

Kunal Bhakta, Co-Founder, First Water Capital Fund said, “It is almost certain that there will be a further rate hike in the upcoming RBI policy. Rate-sensitive sectors like housing, auto, and financials will obviously be adversely affected. However, there is substantial pent up demand currently and that has ensured that the rate hikes so far have failed to create any dent.”

“From here on in, there is bound to be a moderation in demand as far as autos and housing is concerned, which will effectively mean that the opportunity to substantially ramp up volumes for autos may get restricted, even if the semiconductor issue passes. Banks of course will see treasury losses on their bond portfolio and demand for credit might moderate as well. Housing starts might slowdown but inventory in the system will reduce, which is not a bad thing for long term prospects of the sector,” he added.

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