RBI Could Raise Repo Rate By Up To 50 bps

According to ET’s poll of 22 market research of experts, Reserve Bank of India is expected to raise its key interest rate by up to 50 basis points, as Europe’s unexpected move to raise interest costs for the first time in a decade illustrates the stickiness of a global price spiral, which prompted the second significant increase in US benchmark rates in as many months.

The majority of respondents, including investment professionals, bankers, traders, and analysts, believe that RBI will shift to a neutral stance from an accommodative one. Despite the fact that the RBI has been providing monetary accommodation, the RBI Monetary Policy Committee (MPC) is likely to remain in line with the global central banks in order to avoid sudden depreciation in the rupee, seeking to mitigate the risks of exaggerated capital outflows and imported inflation, even as domestic prices have recently fallen.

RBI might still be prepared for rising inflation even though it has peaked, according to CEO of Sunlife Mutual Fund. Central banks across the world are raising interest rates, and RBI may still be prepared for rising inflation even though it has peaked.

Policy Announcement on Friday

While keeping the door open to supporting growth, the central bank must now assess the risk of inflation,” he said.

About three-fourths of those polled believe that the repo rate will be raised by up to 50 basis points; the rest expect an increase of between 25 and 35 basis points. Since the key repo rate, which determines the interest rate charged by main street banks for short-term loans from the central bank, hasn’t yet reached the pre-epidemic level of 4.90%, it appears unlikely that it will be raised any time soon.

In June, India’s consumer price inflation rate dropped to 7.01%, the lowest level in eight years. The economy’s rate of inflation at 7.80% in April was the highest in a decade. Central bank governor has said that “inflation appears to have peaked,” while at the same time highlighting the danger of high volatility.

Restraining Inflation

According to head of QuantEco Research‘s economics division, the August policy could emphasise inflation targeting, given the continued instability in the global currency markets.

The Indian rupee fell to a lifetime low of 80.06 against the US dollar on July 21 as sustained fund outflows bit hard on the currency. It has since recouped some of the ground it lost, which is close to 7% since the beginning of the year.

Prices for crude oil, a key driver of domestic inflation, dropped below $100 a barrel about two weeks ago. As forecasts of additional supplies failed to materialize ahead of this week’s important meeting of major oil-producing nations, prices have risen to $108 a barrel.

According to chief economist at ICRA NSE -0.43 % Ratings, all central banks, including the RBI, should be data dependent because global economic fundamentals are changing rapidly. However, she believes that there is merit in stating the direction of rates and liquidity in the future because the situation is so unusual.

Is this a rare half-point hike in ECB interest rates, based on data that indicates the current bout of inflation requires a policy reversal to cool the economy, a signal that policy makers are moving away from their prior guidance? The Federal Reserve appears to be on board with aggressive rate increases as a result of the recent increase in inflation rates in the United States, which technically slipped into recession in the second quarter following a broad economic output data point.

On Tuesday night, rates of interest in interbank transactions rose 60 basis points higher than the repo rate, then on Thursday, liquidity in the Indian financial system narrowed to Rs 76,034 crore.

The chief economist at RBL Bank expects the RBI to offer some measures that will ease access to credit. This would increase growth throughout the country, as seen before during festival times.

This conclusion is due to sluggish domestic conditions and recent fiscal tightening policies.

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