The Reserve Bank of India (RBI) is likely to raise the repo rate by 40 basis points for the second time in five weeks at the conclusion of the monetary policy committee's three-day meeting on June 8, according to a Moneycontrol poll of 15 economists.
The committee held an unscheduled meeting in early May and voted unanimously for a 40 basis point repo rate hike in anticipation of a huge increase in April inflation. The repo is the rate at which the RBI lends short-term funds to banks.
Data released on May 12 confirmed these fears, with Consumer Price Index (CPI) inflation surging to a near-eight-year high of 7.79 percent in April–not only well above the upper bound of the 2-6 percent tolerance band but the 31st month in a row that it had come in above the medium-term target of 4 percent.
While the median of economists' predictions points to a 40-basis-point rate hike on June 8 to 4.80 percent, they were far from unanimous in their expectation of the quantum of rate hike the MPC is likely to announce, with estimates ranging from 25 basis points to at least 50 basis points. One basis point is a hundredth of a percentage point.
"In this backdrop of inflation persisting beyond 6 percent and growth chugging along, we expect the RBI MPC to hike policy repo rate by 40 bps in June and 35 bps in August. We must highlight that for the sake of standardised steps, the chances of delivering a 50 bps + 25 bps hike combination is quite high too," noted Bank of America Securities in a note on June 3.
50 and above?
A sizeable number of economists, though in the minority, see the possibility of the repo rate being raised by 50 basis points or more.
Deutsche Bank expects a rate hike of at least 50 basis points, though it hasn't ruled out the possibility of a 60-basis-point hike.
In view of the elevated inflation trajectory, the RBI will have to frontload rate hikes just like the US Federal Reserve, and decisive action at this juncture will go a long way, in our view, toward containing inflation and inflation expectations over the medium term," Kaushik Das, Deutsche Bank's chief India economist, said.
Frontloading of rate hikes seems to be the theme, with Morgan Stanley predicting successive rate hikes of 50 basis points on June 8 and in early August.
As expected, soaring inflation is the key driver for economists' predictions of a rapid increase in the repo rate.
As per the median of 10 economists' estimates–ranging from 6.2 percent to 6.9 percent–the central bank may make an upward revision of 80 basis points to its FY23 CPI inflation forecast of 5.7 percent and take it to 6.5 percent.
"We think the RBI may revise its inflation forecasts higher to 6.2-6.5 percent, with an emphasis on the risk of elevated near-term prints." However, we do expect the RBI to continue to predict a gradual decline in inflation over its forecast horizon, "said Rahul Bajoria, Barclays' chief India economist.
The RBI's most recent forecast, released in April, said headline retail inflation would average 6.3 percent in April-June, 5.8 percent in July-September, 5.4 percent in October-December, and 5.1 percent in January-March 2023.