Summary: With food and fuel prices going through the roof, economists expect the Reserve Bank of India, to go for faster, steeper interest rate hikes over the next few months. As per a Reuters poll of economists, the repo rate could reach its terminal level early next year. It further projects the central bank to raise its key policy rate by at least 100 basis points over the next four MPC meetings, the first of which will be held next week between June 6 and 8. This hawkish sentiment gained currency after the RBI announced an out-of-policy repo rate hike of 40-bps in May. Manish Banthia of ICICI Prudential AMC, for instance expects the RBI to hike rates by 150 basis points over the next three policy reviews with a 50-basis point hike every two months. Manish Banthia, senior fund manager - fixed income, ICICI Pru AMC says witnessing ‘interest rate adjustment’ scenario. RBI needs to normalise repo rate amid recovery. Interest rate swap market pricing-in repo rate at 6% over 3-6 months and liquidity withdrawal to continue during this period. Liquidity adjustment will be in focus, says Banthia. Surplus liquidity in the system is being withdrawn rapidly amid inflationary pressures. According to bankers, the increase in the cash reserve ratio to 4.5% since May 21, has sapped 87,000 crore rupees from the system. In addition, the RBI is selling dollars and sucking out rupee liquidity, resulting in excess liquidity coming down rapidly. According to the central bank’s data, the daily liquidity absorption from the banking system was 2.96 trillion rupees on May 30. This was lower than 3.22 trillion rupees registered on May 20 – a day before the CRR hike came into effect. Bankers believe the central bank may be moving towards reducing the liquidity surplus to 1.5% of NDTL. As far as next week’s meeting is concerned economists expect the RBI to raise repo rate anywhere between 35-50 bps. They also expect the retail inflation projection to be revised upwards to a maximum of 6.9% for FY23. However, experts are divided on steps towards liquidity absorption. While bankers expect no hike in CRR, the economists expect yet another 50-bps hike. Rahul Bajoria of Barclays’, for instance says, “A further tightening in liquidity cannot be ruled out. We expect a 50 bps increase in the cash reserve ratio again to take the level to 5% in our base case.” Indian econo my is facing a dichotomy of surging prices and a good agricultural production outlook. Thus, it’s getting increasingly difficult to predict the monetary policy action. Nonetheless, a rate hike in June is a ‘no-brainer’, but the markets will be eyeing RBI governor Shaktikanta Das’ comments on growth outlook, liquidity measures and inflation projections. On Friday, India’s Services PMI data, the US’ jobs data, and other stock-specific action will guide the markets. Watch video
