RBI MPC outcome on June 8: Will the central bank go for another 40-basis points rate hike?

At a time when the economy has been facing inflationary pressures on account of soaring oil prices and supply-side constraints due to the current geopolitical situation, the RBI is trying hard to tackle the growth-inflation matrix. There are expectations that the central bank may increase the repo rate by up to 40 basis points in its upcoming monetary policy outcome on June 8.

In a surprise move, the central bank in May had already increased rates by 40 basis points. Commenting on the upcoming monetary policy outcome, Pankaj Pathak, fund manager-fixed income, Quantum AMC said, “We expect that the RBI may hike the repo rate by another 35-40 basis points in the June meeting. However, we will not be surprised if they prefer to go slow on rate hikes given the government is also responding to the inflation risks. The recent announcement on fuel tax cuts and reduction of import duties on edible oils will provide some comfort to the RBI.”

India’s retail inflation surged 8-year high to 7.79 per cent in April, breaching the upper limit of the Reserve Bank of India’s (RBI’s) target range for the fourth consecutive time, according to data released by the Ministry of Statistics and Program Implementation. The surge was largely driven by rising fuel and food prices.

Jyoti Prakash Gadia, managing director, Resurgent India said, “The RBI governor may go in for a repo rate increase of 25 basis points to 40 basis points in the next meeting.”

“With the prolonged war situation, any immediate solution to effectively reduce inflation does not seem to be visible and further rate hikes in stages over the next two to three quarters may also take place to curb the inflationary pressures,” Gadia added.

Market watchers also believe that the Q4 tardy growth numbers of 4.10 per cent are bound to lead to a downward revision in the growth projections by RBI for the next year, considering the elevated levels of inflation, which is impacting the demand in a big way. “The expected GDP growth in 2023 may face uncertainties with a possible range of 6.5 per cent to 7.5 per cent,” said Gadia.

Dhruv Agarwala, Group CEO, Housing.com, PropTiger.com and Makaan.com said, “The RBI is expected to increase the repo rate once again in the forthcoming monetary policy review to contain inflation which is largely being driven by global factors such as the Ukraine war. At this juncture, we can understand the compulsion of the RBI to raise interest rates. However, the hike should be gradual as it could impact the growth of the real estate sector which is a major driver of the economy.”

Pathak further added that RBI’s surprise hike in CRR rate at the start of the month has fuelled an expectation of a further hike in CRR rate in the June policy. However, surplus liquidity in the banking system has fallen sharply in the last three weeks. Currently, the net excess liquidity parked under the RBI’s LAF window is close to Rs 3 lakh crore. “We believe the RBI will be comfortable with this level of liquidity at this juncture.  So, it may keep the CRR rate unchanged. The bond market is already positioned for frontloaded rate hikes,” he added.