Home Interest rate RBI to raise key rates in August but no consensus on size

RBI to raise key rates in August but no consensus on size


The Reserve Bank of India will raise its benchmark rate on Friday, economists polled by Reuters said, but there was no consensus on the scale of the move given the lack of any clear guidance from the central bank.

As inflation hits its highest level in nearly a decade and the rupee trades at a record low, the RBI, which only started raising rates in May, is expected to step up subsequent hikes to catch up. its global peers.

Forecasts from 63 economists polled between July 25 and August 1 ranged from a 25 basis point hike to 50 basis points when the RBI meets on August 5.

More than 40% of economists, 26 out of 63, expected the RBI to make a sharp hike of 50 basis points, taking the repo rate to 5.40%. More than a quarter of respondents, 20 out of 63, forecast a lower increase of 35 basis points. About 22%, 14 of 63, said 25 basis points while the other three said 40 basis points.

“The RBI should bring some clarity of thought, but when there are so many uncertainties, it is better not to have expectations and not be able to meet them,” said Kunal Kundu, Indian economist at Societe Generale, which predicted a rise of 50 basis points.

A slim majority of economists, 35 out of 63, saw the repo rate already hit 5.75% or more by the end of the year, up 10 basis points from a July poll, while the median expectation is at least 6% in the second quarter of next year. .

The RBI has raised rates twice so far this cycle, first catching markets off guard with a 40 basis point hike at an unscheduled meeting, followed by 50 basis points in June.

Kaushik Das, chief economist at Deutsche Bank, said the bank hoped the RBI would agree on the merits of the frontloading rate hikes.

“The RBI can still reduce the pace of rate hikes from September onwards if inflation and growth momentum slow, but we believe it is a risky strategy at this stage to be an outlier by offering hikes rates below 50 basis points.”

The outlook for next year was even less clear, with end-2023 forecasts ranging from 4.75% to 6.75%.

With the RBI relatively lagging behind in the global tightening cycle, India experienced large capital outflows, which helped push the rupiah down to historic lows near 80 to the US dollar.

With the dollar expected to remain strong in the short to medium term, the RBI has few options to defend the rupee without burning foreign exchange reserves.

Just over half of respondents, 20 out of 38, who answered an additional question, said the exchange rate plays a bigger role than normal in the RBI’s interest rate deliberations.

“The RBI’s anticipated rate hikes will be complementary to their intervention in the foreign exchange market to manage the rupee’s exchange rate,” said Sanjay Mathur, chief economist for Southeast Asia and India. at ANZ.