RBI to go for another 0.40% rate hike next week

The Reserve Bank is expected to go for another rate hike of 0.40 per cent at the scheduled review of the monetary policy next week, a foreign brokerage said on Friday.

The central bank's rate setting panel will follow it up with a 0.35 per cent hike in rates at the next review in August, or make it into a 0.50 per cent hike next week and a 0.25 per cent increase in August, to make the total quantum of rate hikes at 0.75 per cent, the report by Bofa Securities said.

On May 4, the Reserve Bank of India (RBI) hiked rates by 0.40 per cent, and Governor Shaktikanta Das has already called a rate hike at the forthcoming review as a "no brainer" given the pressure to maintain its core mandate of inflation in the targeted band of under 6 per cent.

The report from the brokerage said it sees the headline inflation for May to come at 7.1 per cent due to a sharp increase in tomato prices.

While mentioning about measures like the excise duty cuts on fuel products, duty free imports of crude soyabean and sunflower oil and cut in ATF prices, the report said such moves will help avoid a runaway increase in inflation.

However, it said the consumer price inflation will average 6.8 per cent -- much above the RBI's tolerance limit of 6 per cent -- in FY23.

The central bank will itself do an upward revision of its estimate to 6.5 per cent in FY23 from the present 5.7 per cent, it added.

"... we expect the RBI MPC to hike policy repo rate by 0.40 per cent in June and 0.35 per cent in August.

"We must highlight that for the sake standardised steps, the chances of delivering a 0.50+0.25 per cent hike combination is quite high too," the report said.

The key thing is that RBI MPC exits ultra-accommodation by August and takes policy repo rate to the pre-pandemic level of 5.15 per cent, it said, adding that if inflation continues to be high after that, the RBI will take the repo rate to 5.65 per cent by end of FY23.

The brokerage said it also sees another 0.50 per cent hike in the Cash Reserve Ratio (CRR) or the ratio of demand deposits parked by lenders with the RBI without any return, as the central bank moves to normalise liquidity conditions by withdrawing excess stock.

It can be noted that the RBI had hiked the CRR by 0.50 per cent to 4 per cent on May 4 to suck out Rs 87,000 crore of liquidity from the system.

On the growth front, the brokerage retained its estimate of a 7.4 per cent expansion in the real GDP for FY23, and added that the RBI will also maintain its 7.2 per cent estimate.