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Market Expects 35-50 bps Rate Hike; Eyes Will be on Forward Guidance

Will RBI MPC Surprise Markets? The Reserve Bank of India is set to hold the Monetary Policy Committee (MPC) meeting for the financial year 2022-23 this week on August 3-5, 2022. In tandem with ECB and US Fed’s rate hike, the central bank is also likely to hike its key policy rate by up to 50 basis points.

Another Rate Hike on Cards?

Sensex and Nifty 50 were down about 0.5 per cent each at 57,859 points and 17,254 points in early morning trade on Tuesday. Much of the weakness was because of poor cues from global markets like fear of recession, and central banks raising interest rates across countries.

Ahead of the MPC meeting which starts tomorrow, investors will be on a wait-and-watch mode as they await the Reserve Bank of India’s decision on interest rates. After increasing interest rates by sharp 90 basis points together in May and June, analysts are expecting another hike.

Dr. VK Vijayakumar, Cheif Investment Strategist at Geojit Financial Services, said: “The MPC is likely to raise the repo rate by 25 to 35 bp. A 50 bp rate hike was discussed as a possibility a few days back since the dollar index was steadily rising and capital outflows due to FII selling was becoming a cause of concern. But, the situation has suddenly changed with the dollar index declining from above 109 to below 106, FIIs turning buyers, and the rupee appreciating. Therefore, the most likely outcome will be a 25 to 35 bp rate hike. Monetary tightening to rein in inflation is not necessary since inflation is trending down benefiting from commodity price correction. A 25 to 35 bp hike is already discounted by the market and, therefore, will not have any impact.”

Punit Patni, Equity Research Analyst, Swastika Investmart Ltd., said: “Calling the current economic situation a predicament for the RBI is an understatement, the current global growth slowdown, tight US labor markets, rising current account deficit, and the rising probability of stagflation are making it extremely difficult for the RBI to follow a calibrated approach. However, the market is expecting about a 50 Bps rate hike in the upcoming MPC meeting. Another point to note is that we have passed the peak of inflation, but it could nonetheless remain sticky due to the global supply side constraints and disruptions which are beyond the control of any central banks. Hence, future rate hikes shall continue albeit at a less severe intensity.”

Ritika Chhabra- Economic and Quant Analyst, Prabhudas Lilladher, said that “We expect RBI to hike rates by 35bps to 40bps in the coming MPC meet on August 5. While the inflation is still above the upper limit of 6 per cent, we are seeing some softening in inflationary pressures with the latest June CPI recording 7.01 per cent, down from 7.04 per cent in May and 7.79 per cent in April. The overnight rates have moved above the repo rate and clearly, this will work towards inflation control. While the rate hike between 35-50bps is mostly priced in, the forward guidance from the governor will impact the markets.”

The bi-monthly policy will be announced on Friday.

Further, with consumer price inflation (CPI) falling to 7.01 per cent in June, analysts expect the MPC to lower its inflation forecast by 6.7 per cent for FY23. Earlier this month, RBI governor Shaktikanta Das said that inflation appears to have peaked, while cautioning that commodity prices remain high despite the softening trend observed in June.

Market indicators are showing signs of pricing at the end of the rate-hiking cycle. Analysts at rating agency Crisil said in a recent note that the overnight indexed swap (OIS) curve has undergone ‘bull-flattening’ since mid-June. “It shows the market is betting the Reserve Bank of India (RBI) could cut rates faster than expected once it is done with the rate hikes,” the note said.

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