50 basis points repo rate hike imminent: SBI Research

The Reserve Bank of India's monetary policy committee (MPC) is expected to hike the key policy rate by another 50 basis points to 5.9% in its meeting next week, according to SBI Research.

RBI governor Shaktikanta Das-led six-member monetary policy committee is scheduled to meet during September 28-30. The policy decision will be announced on September 30, the last date of the meeting.

"We expect the peak repo rate in the cycle at 6.25%. A final rate hike of 35 bps is expected in December policy," says Soumya Kanti Ghosh, group chief economic adviser, State Bank of India. Aggressive response to external shocks by RBI has been just appropriate to tackle the uncertainty regarding inflation persistence, he adds.

With liquidity in a deficit mode, the RBI may carefully calibrate its statement given that government cash balances is still at record highs, Ghosh says, adding that the good thing is that with capital inflows picking up rapid pace in August and continuing in September, liquidity could get an unlikely buffer of rupee injection in lieu of dollar purchases or building up reserves.

The report highlights a resurgence of food price pressures, spatial unevenness in rainfall, and uncertainty surrounding energy prices as risks for growth.

In the past three MPC meetings, the RBI has raised the repo rate, the interest rate at which the RBI lends to commercial bank, by 140 bps in total since May this year. On August 5, the RBI had hiked repo rate by 50 basis points to 5.4%, taking it to the highest level since August 2019.

Foreign brokerage Morgan Stanley too expects a repo rate hike of 50 bps in the policy meeting next week. Earlier, it was expecting a 35 bps hike, but it revised upward citing sticky inflation.

Domestic brokerage firm ICICI Securities also expects the RBI to raise its policy rate by another 50 bps at its policy meeting at the end of this month, and a further 25 bps in December meeting to 6.15%. It also added that the cumulative impact of this year’s monetary tightening is likely to help bring headline CPI inflation back below 6% year-on-year in November 2022 and beyond.

This comes at a time when India's retail inflation, measured via Consumer Price Index (CPI), rose to 7% in August.

The central bank is likely to remain hawkish this year and maintain a reasonably tight policy stance in 2023 to prevent domestic inflationary pressures from building further, according to Moody's.

"We also expect inflationary pressures to weaken in the second half of the year and further next year. A quicker letup in global commodity prices would provide significant upside to growth," the ratings agency said earlier this month.