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Inflation Key Focus, Repo Rate May Rise 50 bps, Say Experts

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The Monetary Policy Committee (MPC)’s three-day deliberations, which started on Wednesday, are going on. The RBI’s rate-setting panel will announce its decision on Friday (September 30). Analysts expect another 50-basis-point hike on Friday to control inflation, which saw an uptick in August and stood above at 7 per cent, above the RBI’s 6 per cent upper target.

In the past three monetary policy reviews since May this year, the RBI’s rate-setting panel has raised 140 basis points in total. Currently, the repo rate, the interest rate at which the RBI lends to the commercial bank, stands at 5.40 per cent.

Independent market analyst Kush Ghodasara said, “As per the US Fed announcement, the worst is yet to come and we have to prepare for it. Inflation over the coming months will remain elevated but within the threshold. The markets can stumble down further as we have outperformed; profit booking can come in vigorously.”

He added that a 50-basis-point hike in the repo rate is expected as inflation is not yet anywhere near to what has been projected.

Jyoti Prakash Gadia, managing director of Resurgent India, said, “The sticky inflation, consistently above the benchmark rate in the past three months, along with non-abating food price rise, will force the RBI to have a hawkish view, and a 50-basis-point rise in the repo rate is expected in the next policy review by the RBI.”

Gadia added that the inflationary trends are expected to continue and there are supply-side constraints also, in addition to the rising prices and interest rates across the globe. The world economy is heading towards recession, which will adversely impact the growth prospects of India also and this may lead to a review of the growth projections by the RBI, too.

“With the RBI hands being virtually tied in the current rising interest regime, no surprises are expected from the RBI at this stage and it shall work towards taming inflation,” Gadia said.

Gadia said the onus will lie on the government to continue its efforts to boost investment with suitable fiscal measures and reforms for ensuring a firm revival and growth trajectory. On the liquidity front, the RBI may work towards stop taking further steps of absorption of liquidity, given the current upsurge in short-term rates.

India Ratings has said the economic outlook continues to be uncertain due to — cereal inflation; weakness in currency; elevated global commodity prices; pick-up in services demand; and revision of natural gas prices in 2HFY23 (due in October 2022).

The rating agency, therefore, said that in line with the major central banks across the world, the RBI will continue to follow a tighter monetary policy regime and another 25-50 bp hike in policy rates is expected in FY23. However, the timing of these hikes will be data-dependent.

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