RBI likely to raise interest rate by 25 bps-50 bps today: Experts

RBI Governor Shaktikanta Das has already indicated that there may be another hike in the repo rate though he refrained from quantifying it

Reserve Bank of India (RBI) is likely to raise the benchmark lending rate by 25-50 basis points on Wednesday as inflation continues to remain above its comfort level, say experts.

Last month, RBI raised the repo rate or short term lending rate by 40 basis points in an off-cycle monetary policy review to check spiralling inflation.

The decision of the RBI Governor Shaktikanta Das-headed Monetary Policy Committee (MPC), which started its deliberations on Monday, is scheduled to be announced at 10 am on Wednesday.

Das has already indicated that there may be another hike in the repo rate though he refrained from quantifying it.

The Consumer Price Index (CPI) based inflation, which RBI factors in while arriving at its monetary policy, is on the rise since October 2021.

Retail inflation has remained above RBI's upper tolerance level of 6 per cent since January. It had soared to an 8-year high of 7.79 per cent in April, exceeding the RBI's tolerance band for inflation of 2% to 6% for a fourth month in a row. Inflation is expected to stay high in the near future.

The government has tasked the central bank to ensure retail inflation remains at 4 per cent with a margin of 2 per cent on either side.

A report by HDFC Bank Treasury Research Desk said RBI is expected to raise the policy rate by 25 bps while continuing to keep its stance and the CRR rate unchanged.

"We tilt on the side of a 25 bps rate hike instead of 50 bps as we do not see a compelling case for a larger rate hike at this stage," it said.

It expects RBI to change inflation forecast by 70-80 bps from 5.7 per cent earlier, citing the change in global and domestic price pressures.

Indranil Pan, Chief Economist at Yes Bank, said the inflation surprise has brought to the fore the need for RBI to tighten the monetary policy.

"We see RBI extending its 40 bps repo hike of May with a 35 bps increase in June, followed by 25 bps each in August and September. By this time, we expect the global growth to have softened enough to pull down commodity prices and thus provide some comfort to the domestic inflation cycle too," he said.

Saransh Trehan, Managing Director of Trehan Group, opined that RBI is likely to increase the key policy rates by up to 50 basis points.

Banks will eventually pass it on to borrowers. However, given the prevailing historical low interest rates, it will not make significant impact on the demand, he said.

"We expect the policy rate to go up by 35-50 bps. RBI is, however, likely to continuously provide liquidity support through the LAF window to sustain the growth process. It would provide support to the government borrowing programme while controlling the hardening of yield through policy twists," credit rating agency Infomerics said.

Analysts also expect the RBI to reduce liquidity, reinforcing its fight against inflation and extending its effort to return monetary conditions to what they were like before the pandemic prompted radical action to stimulate the economy.

"We see the RBI continuing with measures to absorb liquidity," BofA Global Research said in a note on June 3, predicting a 50-basis-point increase in the cash reserve ratio (CRR) for banks, which would absorb around Rs 87,000 crore in the banking system.

Anand Nevatia, Fund Manager at Trust Mutual Fund, said that with RBI now prioritising inflation targeting over growth, "we expect 35-50 bps rate hike along with hike in CRR to bring down liquidity".

The government has tasked RBI to ensure CPI-based inflation remains at 4 per cent with a margin of two per cent on either side.

Last month, MPC raised the key policy rate (repo) by 40 basis points to 4.4 per cent to tame the rising inflation. It was the first rate hike after August 2018.

With an aim to cushion the impact of lockdown, RBI had slashed the repo rate by 75 basis points to 4.40 per cent in March 27, 2020 from 5.15 per cent.

On May 22, 2020, RBI again cut the repo rate by 40 basis points and brought it down to 4 per cent. Thereafter, it maintained status-quo in the benchmark interest rate for almost two years before increasing it on May 4, 2022.

"A hike at this week's RBI ... policy meeting is a foregone conclusion," said Radhika Rao, senior economist at DBS Bank.

"Inflation has proved to be persistently high in the past three years, even as drivers have changed - from supply bottlenecks to commodities and reopening pressures," she added.